Beruflich Dokumente
Kultur Dokumente
The Architecture of
Illegal Markets
Towards an Economic Sociology
of Illegality in the Economy
Edited by
Jens Beckert and Matías Dewey
1
3
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Acknowledgments
List of Figures ix
List of Tables xi
List of Contributors xiii
15. The Price Is Not Right: Financialization and Financial Crime 286
Robert Tillman
Index 305
viii
List of Figures
Jens Beckert is Director of the Max Planck Institute for the Study of Societies, Cologne.
Ronald L. Breiger is Regents’ Professor in the School of Sociology at the University of
Arizona.
Matías Dewey is a senior researcher at the Max Planck Institute for the Study of
Societies, Cologne.
Cyrus Dioun is a doctoral candidate in the University of California Berkeley Depart-
ment of Sociology and a data science fellow at the Berkeley Institute for Data Science.
Kirsten W. Endres is Head of Research at the Resilience and Transformation in Eurasia
Department, Max Planck Institute for Social Anthropology, Halle/Saale.
Nina Engwicht is a researcher at the Peace Academy Rhineland-Palatinate, Academy
for Crisis Prevention and Civil Conflict Management, Landau, Germany.
Victoria A. Greenfield is a visiting scholar at the Department of Criminology, Law, and
Society, George Mason University, Fairfax, VA.
Thomas J. Holt is Professor in the School of Criminal Justice, Michigan State University.
Annette Hübschle is a postdoctoral researcher with the Environmental Security Obser-
vatory at the University of Cape Town, South Africa.
Simon Mackenzie is Professor of Criminology at Victoria University of Wellington and
a member of the Scottish Centre for Crime and Justice Research at the University of
Glasgow, where he is Professor of Criminology, Law, and Society.
Renate Mayntz is Emeritus Director of the Max Planck Institute for the Study of
Societies, Cologne.
Meltem Odabaş is a PhD candidate in the School of Sociology at the University of
Arizona.
Ronen Palan is Professor of International Political Economy at City University London.
Letizia Paoli is Professor of Criminology at the University of Leuven Faculty of Law.
Vadim Radaev is Professor and Head of the Laboratory for Studies in Economic
Sociology at the National Research University Higher School of Economics, Moscow.
Boris Samuel is a research fellow at the Chair of Comparative African Studies,
Mohamed VI Polytechnic University, Rabat and an associate researcher at Sciences
Po CERI, Paris.
Philippe Steiner is Professor of Sociology at the University of Paris-Sorbonne.
List of Contributors
xiv
1
Introduction
Estimates place the annual revenues from market exchanges that violate the
law at over 653 billion US dollars (Economist 2013).1 From illegal drugs, stolen
artwork, and forged trademarks, to fraud on financial markets, the phenom-
enon of illegality in market exchanges is pervasive. Transactions on markets
that are outright illegal and illegal transactions in legal markets are econom-
ically important, have significant social and political consequences, and shape
market structures in specific ways.2
Strangely, the field of economic sociology remains almost silent on the
topic. This is despite the broad range of topics addressed in economic soci-
ology over the past thirty years and the fact that the “architecture of markets”
stands at the center of much of the sociological approach to the economy
(Fligstein 2001). With few exceptions (Beckert and Wehinger 2013; Centeno
and Portes 2006; Fligstein and Roehrkasse 2015; Dewey 2015; Dioun and
Haveman 2016), however, the literature unquestioningly accepts the premise
that the institutional structures and exchanges taking place in markets are law
abiding in nature. Though some scholars have complained about this (Zelizer
2007; Sørensen 2003), illegality and crime have not been established as major
fields of analysis. Economic sociology has addressed neither the consequences
of the illegal production, distribution, and consumption of illegal products for
the architecture of markets, nor the underlying causes or political and social
1
Such figures are notoriously imprecise and cannot provide more than a rough estimate of
illegality. Moreover, the estimate does not include illegality in markets in the form of rule
violations, what we call “type 5” markets.
2
We would like to thank Henri Bergeron, Renate Mayntz, Letizia Paoli, and Philippe Steiner for
their valuable comments on an earlier version of this introduction.
Jens Beckert and Matías Dewey
3
This does not imply that conditions of perfect polypolistic competition must be given.
Without any competition, however, we could not speak of a market. Steiner and Trespeuch
(2015) (see also Steiner in this volume) argue that the notion of “illegal markets” is a misnomer
because the transactions lack the guarantee of property rights by the legal system. They suggest
“illegal exchanges.” We do not follow this suggestion based on our definition of markets. However,
there are clearly different degrees of “marketness” in illegal transactions. This itself would be an
interesting point for empirical investigation.
2
Introduction
market exchanges, making clear that we have entered into a social space
structured around sellers and buyers. Putting market exchanges at the center
of the investigation provides a different and more comprehensive perspective
to the study of illegality in the economy compared with a focus on criminal
organizations. This perspective takes into account the interactions between
the supply and demand sides, emphasizes the demand side as the propelling
force behind illegal market exchanges, stresses the interfaces between illegal
and legal action, and investigates the coordination problems faced by actors
when their transactions violate the law. Secondly, unlike qualifiers such as
“shadow,” “underground,” or “black,” the adjective “illegal” makes no bones
about the nature of the phenomenon we are confronted with: market
exchanges that stand in violation of the law. Thirdly, by including the exchange
of products or services whose production, exchange, or consumption are pro-
hibited, the approach goes beyond what is usually known as the informal
economy. Research on the informal economy has been concerned mainly
with the distinction between wage employment and self-employment (Hart
1973), and the avoidance of regulations (Centeno and Portes 2006: 26; Portes
2010: 134). While several contributions in this volume suggest considerable
overlap of both phenomena, they are also in many ways distinct. Fourthly, the
focus on markets allows for a systematic comparison between the functioning of
illegal and legal markets and enables us to bring the investigation of illegality
within the context of a broader debate on markets, capitalism, and the role of
the state in them.
In this introduction we will develop conceptual ideas for the study of illegal
markets and illegality in markets from the perspective of economic sociology.
Our interest focuses on the social organization of illegal markets, including
their relationship to the state, social norms, political power, and capitalist
accumulation. In the course of developing these conceptual ideas we will
locate the chapters of the volume and introduce them briefly.
We will start by presenting a typology of different forms of illegality in
markets, followed by a discussion of the role of the state in illegal markets.
Illegal markets, we argue, are illegalized arenas of exchange, which makes the
state a central actor in them. This is followed by a discussion of several
interfaces essential to illegal markets: the interface between illegality and
informality, the interface between illegality and legitimacy, and the interface
between illegality and legality. In the subsequent section we discuss the
peculiarities of the social organization of illegal markets, bringing to the fore
the parallels and differences in the organization of markets under conditions
of legality and illegality. Finally, in the last section we discuss the connection
between illegality and the capitalist economy. Illegality in markets is not
simply a parasitic phenomenon at the fringes of the economy. Instead, it is
an integral part of capitalist accumulation and should be investigated as such.
3
Jens Beckert and Matías Dewey
Illegal Markets
Illegal markets and illegal practices within markets are multifaceted phenomena
that require typological distinctions in order to be accessible for research. Though
they both involve law breaking, there is a marked difference between, say, the
heroin market (Paoli et al. 2009), in which the production, transportation, sell-
ing, and consumption of the product are all illegal, and the manipulation of
Libor rates by banks, which involves illegal activities taking place within a legal
framework of financial institutions and financial markets. The heterogeneity of
phenomena within the broad category of illegal markets can be systematized in a
typology that distinguishes between five types of illegality in markets (Wehinger
2011; Beckert and Wehinger 2013):
The first type refers to markets in which the traded good (or service) is itself
forbidden, including its production. This is the case for drugs, child pornog-
raphy, child prostitution, and so on. As a consequence of the prohibition of
the good, its subsequent trade and consumption are equally outlawed. Trans-
actions in these products form markets in their own right, which are largely
segregated from the legal economy.
The second type refers to stolen products. Here the product itself is legal but
has come into the possession of the person attempting to sell it illegally,
making its sale and purchase (if the theft is known to the buyer) also illegal.
Examples include market transactions with stolen cars, antiques, or artworks.
Transactions for these products can be organized on separate markets in
which the stolen products are traded or the products can be channeled into
legal markets.
The third type entails products that have been falsified, counterfeited, or
forged. While the act of counterfeiting products itself is often not outlawed (as
is the case for the counterfeiting of art works), it is illegal to trade in these
products. Counterfeit products constitute a major portion of illegal transac-
tions in the economy, including the counterfeiting of trademarks for con-
sumer goods and spare parts for industrial goods. Also in this category are
counterfeit medicines, which may be marked with either the wrong dose of
the effective substance or no dosage at all, and may thus be harmful to the
patient. Falsified and counterfeited medicines are assumed to contribute
between 5 and 7 percent to the global pharmaceutical market, with much
higher rates in many of the poorer countries (Paoli and Feytens 2016). Market
transactions can take place in separate markets or become part of the markets
in which the authentic product is being sold.
A fourth type encompasses products that are themselves perfectly legal, but
trading of which is outlawed. Examples of this are the trade in human organs
(see the chapter by Steiner in this volume), adoptions, and surrogate mother-
hood (in some countries). In the latter case the illegal aspect is not the
4
Introduction
pregnancy itself, but carrying a child for another person with whom a con-
tractual relation exists that stipulates that the child will be handed over at
birth. Often, markets of this type have been described in the literature as
“contested,” “repugnant,” or “noxious” markets (Satz 2010; Steiner and
Trespeuch 2015). Even in the case of their legalization, market transactions
in these products are typically seen as morally offensive. Often the transac-
tions take place in separation from the legal economy.
Finally, in the fifth type of illegality, the production, exchange, and con-
sumption of the products are in principle legal, but actors violate existing
regulations during the production or the exchange process. Examples are the
import of cigarettes in ways that evade taxation, the violation of insider
trading rules on the stock market, the trading of guns without permission,
and the export of diamonds without a Kimberley certificate (see the chapter by
Engwicht in this volume). Much of what is known as the informal economy
can be categorized under this type. Only in the case of certain commodities
does widespread illegal behavior lead to the constitution of a market in its own
right: alcohol (Radaev in this volume), cigarettes, and precious stones are
possible examples of this. Other illegal practices in markets, such as the
manipulation of diesel engines by Volkswagen engineers to falsify emissions
tests, do not constitute an illegal market. This fifth type is certainly the most
complex and probably also the most common because rule violation can take
very different forms, and the legal and illegal aspects are most closely inter-
twined. Violation of regulations can refer to norms in the production process
(for instance, labor laws or environmental laws), but can also refer to norms
regarding product characteristics (for instance, safety standards), norms that
relate to the transaction itself (the license to trade the good, for example, or
rules against insider trading), or laws regarding the rights of third parties (such
as tax obligations to the state, or royalties to be paid to artists).
Table 1.1 depicts the typology, showing the dimensions in which the trans-
actions are illegal in each type. Clearly, the typology is purely analytical in the
sense that, from an empirical viewpoint, a specific market transaction can be
illegal in terms of more than one of the categories and products may be illegal
in certain contexts but not in others. Given the complexity of the empirical
phenomena in question, the overdetermination of the typology is unavoid-
able. This would also hold for any other typology one might develop.4 The
typology introduced here helps the researcher to become aware of, and dis-
tinguish between, different forms of illegality in markets and thus gives not
only an impression of the breadth of possible violations of legal stipulations in
markets, but also helps to structure the field for the researcher. It may also help
4
See, for instance, the distinction between white, grey, black, and criminal markets often used
in criminology (Paoli and Feytens 2016).
5
Jens Beckert and Matías Dewey
to counterbalance the trend that much research on illegal markets has focused
on type 1 markets, especially for drugs, which in reality constitute only a small
part of the phenomenon of illegality in markets (Paoli and Feytens 2016).
At the same time, it should also not be forgotten that the distinction
between legal and illegal is neither homogenous nor static. The assessment
of specific products and transactions varies between places and changes over
time. Surrogate motherhood is outlawed in Germany but not in India
(Rudrappa 2015). Commercial transactions for organs for transplantation
purposes are legal in Iran but nowhere else in the world (Steiner 2010). Paoli
and Greenfield (in this volume) show the ambiguities between legal and illegal
within one jurisdiction with regard to the “quasi-illegal” market for doping
products in sport in Italy, demonstrating that legal ambiguities are a chief
cause of the difficulties faced in prosecuting actors trading in doping products.
Statements about illegality thus always need to be made with reference to
specific legal and social contexts. This also holds because of changes in defin-
itions of legality over time. Products and market transactions may shift in and
out of illegality. The need for a dynamic perspective can be seen in several of
the chapters in this volume. Annette Hübschle analyzes the market for rhino
horn after the “production” of this product became largely illegal through the
international CITIES convention in the 1970s (see also Hübschle 2015 and
2016). Cyrus Dioun describes the opposite process of the legalization of
marijuana in several US states since the 1990s. Making marijuana legal, how-
ever, does not mean that there has ceased to be any illegal aspect in this
market. Concurrently with its legalization, the markets became strictly regu-
lated and producers, vendors, and consumers can act in violation of these new
regulations. The illegality in the states that legalized marijuana switched from
type 1 to type 5.
6
Introduction
From the sociological perspective, it also needs to be kept in mind that the
knowledge of illegal conduct differs between actors. In some cases—especially
in type 1 markets—the illegality of the transaction is clearly visible to all
parties involved. In many other instances, the illegality of the conduct is
much more covert and becomes invisible further down the value chain.
A diamond turned into a piece of jewelry and offered for sale by a jeweler in
Berlin has, for the buyer and the seller, probably completely lost its association
with possible illegal acts at the source of production. Equally, a product that is
completely legal at the beginning of the supply chain may be transformed
into an illegal product later on (see the chapter by Paoli and Greenfield). In
both cases, one of the chief activities of actors involved in illegality is to
camouflage the fact that illegal acts have taken place. Often this is done not
only to avoid prosecution, but also to maintain the value of the product.
A painting known to be forged or stolen sells, if at all, for a fraction of what
it would have fetched otherwise. Hence, as Philippe Steiner maintains in his
chapter, one of the chief characteristics of illegality in markets is secrecy.
7
Jens Beckert and Matías Dewey
concrete actions of the state apparatus behind these definitions and its cap-
ability or willingness to enforce rules.
That a particular product or behavior has been illegalized by the state must
moreover be seen within the wider social and political context. Illegalization
and enforcement are outcomes of moral debates, social demands, and political
power. Prostitution is a pertinent example, as is the alcohol market, as shown
in this volume by Vadim Radaev in the case of Russia. Shaping the boundary
between legal and illegal and deciding on the enforcement of rules is also a
form of governance and often a means of exercising power over marginalized
groups of the population. This also points to the interface between illegality
and legitimacy, to which we will return.
Selective Enforcement
Rule violation in illegal markets does not make the formal rules disappear, and
the state and its agents can selectively exploit the gap between economic
practices and formal rules. Formal rules are devices that allow state authorities
to interfere in informal and illegal practices with the intent to produce order,
to establish positions of domination, or to provide benefits selectively. Referring
to the law, justifying the imposition of the rule of law, selectively enforcing
the law, and bargaining legality are all practices in which state authorities and
economic actors interact in informal settings. Legal definitions are crucial
devices in the hands of state institutions, which shape their practices and
influence both the structure and the extent of illegal markets. Endres’ and
Dewey’s chapters in this volume show just how important legal definitions are
in illegal markets when it comes to the negotiation of order through webs of
generalized protection rackets. Nina Engwicht shows that in illegal diamond
production in Sierra Leone, the state is not simply absent but interferes for its
own goals of taxation. The state benefits from the illegal activities, and min-
imum levels of social and economic security are assured for the communities
involved in the illegal mining. As Boris Samuel stresses in his chapter on
protests against the pricing of consumer goods in Guadeloupe and Mauritania,
the state can pursue clientelistic strategies through the selective enforcement
of laws and public campaigns against illegality. The power of the state lies in
the selective and often arbitrary enforcement of its rules.
The actual enforcement enacted by state agencies can be used as an instru-
ment of social control. In this, non-government organizations, as diffusors of
ideologies and prohibition initiatives, can play a decisive role. The selective
intervention of state agencies is an issue not only for economic transactions
described as informal, but also for illegal markets of the first type; that is,
markets in which the product, its distribution, and its consumption are clearly
prohibited. Annette Hübschle’s chapter is an in-depth portrayal of how racial
8
Introduction
divisions and the activities of civil society advocacy groups provoke selec-
tive enforcement of the law in South African wildlife parks. The typology
suggested by Paoli et al. (2009: 201 ff.) for the analysis of the world opiate
market also addresses this issue: While “strict enforcement of prohibitions”
poses significant risks of incarceration and asset seizure, “non-enforcement”
means the opposite; that is, the tolerance, or even promotion, of illegal
exchanges by formal authorities. According to the authors, the intermediate
possibility is “lax enforcement,” under which entrepreneurs are not guaran-
teed complete immunity from enforcement and still risk incarceration and
asset seizure. It follows that variations in the size and shape of illegal markets
are closely related to these variations in the enforcement of the law.
9
Jens Beckert and Matías Dewey
10
Introduction
who benefited from the protection of state law” (Hart 2008: 16) from other
economies, such as those described by Clifford Geertz (1963) in Indonesia, by
Lomnitz (1975), Seligmann (2004), Babb (2010), and Goldstein (2016) in
Latin America, or by Hart himself in Africa. In these places, the economy
functioned according to a different pattern, one that deviated from Weber’s
sense of rational enterprise. In this perspective on informality, the adjective
“informal” leads to a distinction between unregulated self-employed earnings
and wages from formal employment; that is, between the degrees of rational-
ization of the work process (Guha-Khasnobis et al. 2007: 25). In another
definition, tailored more to developed countries, informality refers to all
kinds of unrecorded economic activity, often motivated by an attempt to
evade taxes (Adriaenssens and Hendrickx 2015). In this view, the business
activities and labor practices in the informal economy often violate state
regulation or tap into spaces unregulated by the law.
Although the economic activity detached from official regulations violates
legal stipulations, they do not form illegal markets. First of all, informal
enterprises deal mainly with legal products, implying that the defining char-
acteristic of informality is the circumvention or avoidance of formal standards
and regulations (Centeno and Portes 2006: 26–7), which we have described as
the fifth type of illegality in markets. Informality comprises “economic actions
that bypass the costs and are excluded from the protection of laws and
administrative rules” (Portes 2010: 134). The notion of informality reminds
us that an understanding of illegality needs to be sensitive not only to legal
definitions, but also to the social contexts in which economic exchanges take
place. This leads us to the issue of the legitimacy of illegal market conduct.
11
Jens Beckert and Matías Dewey
12
Introduction
Legitimate market
Legitimation
Marijuana
Fake clothing
Cigarettes
Cocaine
Stolen parts
Illegal market Legal market
Illegalization Legalization
Tabulization
Art
Arms
Diamonds
Human organs
People
Child pornography Animals
Illegitimate market
Sources of Legitimacy
But where does the legitimacy of illegal products and economic practices
originate? The studies presented in this volume highlight two factors in
tolerance or rejection: externalities and hope for the future.
In the case of externalities, tolerance or rejection arise as a by-product of the
consequences of illegal markets. Market activities have social and economic
effects that can be positive or negative. Among the negative aspects are such
prominent issues as violence, interpersonal distrust, predation of natural
resources, addiction, and human rights violations. There is a vast body of
literature on these detrimental effects brought about by criminal groups and
mafias, or by the qualities of the product traded.5 The more these negative
5
One needs to keep in mind that the prohibition of the legal use of certain goods can itself have
negative externalities, as has often been discussed for the prohibition of drugs. The stance of
prohibiting the exchange of certain goods thus does not necessarily follow a consequentialist
13
Jens Beckert and Matías Dewey
ethics but may entail also an ethics of conviction. We would like to thank Henri Bergeron for
pointing this out to us.
14
Introduction
aspirations and their ability to plan for future events. The market opens a door to
the experience of striving to achieve; it allows actors to experience their capacity
to affect change in their livelihood. Including perceptions of the future (Beckert
2016) in an analysis of the attraction of illegal market activities helps us to
understand an important propelling force behind the expansion of illegal econ-
omies: the motivations of actors participating in these risky arenas of exchange.
The promise of access to products, inclusion in reciprocity networks, economic
citizenship, or simply a certain level of economic autonomy are strong motiv-
ators, as several of the chapters in this volume show.
The relationship between illegality and legitimacy is just one of the interesting
interfaces concerning illegality in markets; another is the interface between
legality and illegality (see also the chapter by Mayntz). Only rarely do markets
15
Jens Beckert and Matías Dewey
6
Such a discount is not to be paid in type 1 markets, where all participants are aware of the
illegality of the transaction.
16
Introduction
enforcement and also personal prosecution, the relationship between the two
sides is often more nuanced than it first appears. As already discussed, law
enforcement has different alternatives with regard to how to interfere in illegal
market activities and their destruction is often not the primary goal. The
representatives of the state may also decide to benefit privately from making
the enforcement of the law a tradable good (corruption) and the state may
exercise power and domination through the selective and arbitrary enforce-
ment of the law.
While the concrete gestalt of the interface between illegal and legitimate, as
well as that between legal and illegal, is largely contingent, the close investi-
gation of these interfaces is crucial to understanding the architecture of any
illegal market. It is from these interfaces that the specific morphology of a
market unfolds.
17
Jens Beckert and Matías Dewey
7
In type 1 and type 4 markets, participation in the illegal market is the only possibility of
gaining access to the good. In type 5 markets moral scruples may play a diminished role because of
the high legitimacy of the activity.
18
Introduction
19
Jens Beckert and Matías Dewey
8
For marijuana consumers, for instance, web pages exist that allow users to report the prices
they recently paid for the drug. See: <http://www.priceofweed.com>.
9
A possible exception to this is type 5 markets. But also for informal markets it holds that legal
protection is at best incomplete, making the threat of violence a more likely instrument to be used
to enforce contracts.
20
Introduction
21
Jens Beckert and Matías Dewey
Paoli and Greenfield show in their chapter, illegal doping products for sport
are increasingly offered for sale through web pages. Another example are fake
spare parts for industrial goods which become instantaneously globally avail-
able through the internet. Odabaş, Holt, and Breiger highlight in their chapter
that the internet has enabled the formation of new markets for illegal goods.
Despite these new online opportunities the challenges for quality assessment
of illegally offered goods remain and form an important research domain for
understanding the social organization of illegal markets.
Paying attention to the coordination problems of actors in illegal markets
shows that market exchanges under conditions of illegality take quite a dif-
ferent form compared with their legal counterparts. Common problems in
legal markets rapidly become acute issues in illegal markets. Propelled by the
need to neutralize the enforcement of the law, problems such as building
trust, avoiding risk, and gathering information lead to strategies, practices,
and moral valuations that are specific to illegal markets. The study of the order
of illegal markets, therefore, is tasked with confronting these particular social
phenomena, including the production of secrecy, the justification of moral
transgressions, strategies to cope with lack of transparency, and the practices
of quality assessment.
22
Introduction
England were violently dislocated from lands to which they had customary
rights.10 In this process of expropriation, important foundations of the capit-
alist economy were laid, allowing the globally operating British wool industry
to emerge and creating a class of landless laborers who would eventually
become the proletariat, fueling the industrialization process. Land-grabbing
processes are not singular to the Industrial Revolution in England and can be
observed in many countries integrating into the capitalist economy today;
China and Brazil are two especially vivid examples.
10
See also Thompson (1963: 237), who speaks of “class robbery.” See also Thompson on the
origin of the Black Act in the United Kingdom (Thompson 1975: chapter 2).
23
Jens Beckert and Matías Dewey
customers in the Global North, while supply is provided by the poor popula-
tions in developing countries.
11
In Paris, Airbnb ran an advertising campaign in 2015 in which it claimed that people renting
their apartments to tourists could realize their life goals through the money they make.
24
Introduction
25
Jens Beckert and Matías Dewey
Tax Havens
The possibilities available to camouflage illegal market conduct have been
enormously enhanced by the legal architecture of tax havens. Tax havens are
financial conduits that, in exchange for a fee, offer their own principal
asset—their sovereignty—as a service to a non-resident constituency of
accountants and lawyers, bankers and financiers, to minimize taxes and
conceal the ownership and origin of financial wealth. They are legal entities
at the center of contemporary capitalism in which legality and illegality mix.
Far from being marginal or in the exotic backwater of the global economy,
tax havens are an integral part of modern business practices (Palan et al.
2006, 2013; Maurer 2006; Harrington 2016). The combination of little or
no income and corporate taxes, lax regulations, robust bank secrecy laws,
and easy incorporation laws make tax havens a magnet for money originat-
ing in illegal markets and fraudulent schemes. Their particular legal structure
provides the necessary legal blanket of secrecy that illegal businesses and
organizations need for their operations (Volkov 2011). This has been shown
to the wider public through the recent data leaks, the biggest of them the
so-called “Panama Papers,” that have exposed the practices of law firms in
tax havens, making it possible to conceal illegal business activities. As Ronen
Palan argues in his chapter, tax havens have the additional function of
expanding illegal market actors’ options by granting secure access to a
large variety of financial instruments that allow profits to be leveraged
against the future. Access to elaborate financial tools allows criminals to
launder money and to change the nature of their business by becoming
able to operate—in the same way as legally constituted companies—in “the
economy of the future.”
26
Introduction
Today, there are at least fifty-six jurisdictions that are commonly identified
as tax havens and connected to cases of money laundering, corruption, and
tax evasion (list of tax havens: Palan et al. 2013: 40–5). Experts claim that tax
havens have not only been a driver of the current European crisis (Zucman
2013), but have also led to rising inequality and human rights violations
(Christensen and Kapoor 2004).
Conclusion
27
Jens Beckert and Matías Dewey
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34
Part I
Conceptualizing Illegal Markets
2
Illegal Markets
Renate Mayntz
Illegal markets have been sadly neglected in the newly flourishing market
sociology (Beckert and Wehinger 2013). But this is not specific to market
sociology. Despite the focal importance of (social) norms in sociological the-
ory and research, the dimension legal/illegal does not play an important role
in most sociological sub-fields, the sociology of law being an obvious excep-
tion. While “the law” and the legal system are important concepts in socio-
logical macro theories, legality and illegality are not. The focal analytical
dimension in dealing with social norms is not their character, but whether
or not they are complied with—in other words, compliant or deviant behav-
ior. Although it is recognized that legal norms are a special category of social
norms due to their formally regulated origin and their mode of sanctioning,
the infringement of legal norms is not treated as a special kind of norm
violation or deviance, again except in the sociology of law. In other words,
in sociological theory generally, the dimension compliant/deviant is not
systematically related to the dimension legal/illegal. This may be characteristic
of a discipline that has developed in countries where what is legal is over-
whelmingly also considered to be legitimate—that is, where legality and
legitimacy are tacitly conflated. It may have been the study of failing or
weak states that called attention to the frequent divergence between what is
legal and what is considered to be legitimate, and has made us realize that this
is an empirically consequential distinction.
The study of illegal markets thus faces the challenge of defining the “nature
of the beast” or its object of cognition more clearly, so as to distinguish
Renate Mayntz
illegality from legality and relate both to the dimension of legitimacy. This
involves establishing conceptual boundaries, and relating them to empirical
phenomena—a tiresome but essential exercise because conceptual clarifica-
tion concerning legality, illegality, and the interface between them is a neces-
sary prerequisite for formulating substantive questions about the genesis and
control of illegality in markets and related forms of illegal action.
38
Illegal Markets
being just or justifiable in moral terms; but in the study of illegal markets it
makes sense to stick to a narrow concept of “legal” in order better to distin-
guish it from the related concepts “legitimate,” “appropriate,” or “moral.”
Where we are dealing with legal rules, it is relatively easy to say what is
formally illegal. Legal rules can be prescriptions (do-rules) or proscriptions
(don’t-rules)—they command, or prohibit. In some fields, such as tax law,
do-rules prevail, but in many fields (for example, traffic regulation, consumer
protection) we find both types.
The core problem in calling an act “illegal” is the often very large room for
interpretation of legal rules. All kinds of formal rules—not only legal ones—
use what in German are called unbestimmte Rechtsbegriffe (undefined legal
terms). This is less true of (regulatory) standards, a category of formal rules
that typically includes quantitative, measurable terms; standards can be
incorporated into law, but can also be based on agreement or convention.
While existing legal rules establish what can be called “illegal,” the term
“legal” is used in practice in two fundamentally different ways, often not
explicitly distinguished: either more narrowly to designate action in compli-
ance with legal rules, or much more widely designating all actions that do not
violate any legal rule. This is a highly important distinction, because many
actions are not subject to any formal, let alone legal, rule—in other words,
they are neither prescribed nor proscribed. The Ten Commandments consist
of do- and don’t-rules, but they cover only a very small segment of human
action. To the extent that sanctioning is tied to the violation of specific legal
rules, the valuation of behavior that does not violate such norms is an open
question. It is here that the dimension of legitimacy comes in.
39
Renate Mayntz
binding (Weber 1956: 26). Thus in a given market order, the observable
practices of market exchange considered to be legitimate by participants
need not be based (only) on compliance with legal norms. The concept of
legitimacy has a wider scope than legality. For the analysis of illegal markets,
the Weberian concept of legitimacy as belief is crucial. Legitimacy beliefs are
social facts to be established empirically. The criteria (or basis) on which
legitimacy is attributed to a given authority, social order, or practice vary
culturally and historically; legitimacy beliefs are not universally shared in
any given society.
The conceptual distinction between (formal) legality and (social) legitimacy
is empirically relevant where not everything that is formally legal is deemed to
be legitimate by “rule takers.” Formal rules are issued by a competent author-
ity, but authority may only be claimed by rulers, not granted by the ruled; this
can hold for clan chiefs, for CEOs, and for governments. In this case, imposed
sanctions are experienced as the unwarranted exercise of power/force; a cer-
tain tax may then be seen as unwarranted political expropriation. On the
other hand, actions formally defined as illegal can be considered legitimate. In
both cases, (formal) legality and (social) legitimacy diverge. If the legitimacy of
a political authority is contested, or if a political authority cannot impose
threatened sanctions, illegality is only formal. Where formal legality and
social legitimacy diverge, legitimate illegality flourishes.
There is a conceptual overlap between the concept of “legitimate illegal-
ity”—in other words, behavior deemed legitimate, although known to be
illegal—and economic action termed “informal.” According to Hart, informal
economic action escapes state regulation, either because it is not regulated or
because, although formally regulated and possibly violating existing rules, it
remains invisible to the bureaucracy (Hart 2010: 141–9). “Informal” thus
covers more than “illegal.” There is also a conceptual overlap between legit-
imacy, defined in the Weberian tradition, and what March and Olsen (2006)
call “appropriate” and define as behavior that is expected and seen as natural
and rightful for members of a given collectivity playing a specific role in a
given situation. While there is a clear distinction between legality and legit-
imacy, the concepts of informal economic action and of “appropriate” market
transactions gloss over the difference: informal economic action, as well as
appropriate behavior, can be legal as well as illegal, which ignores the tension
that exists where legality and legitimacy diverge.1 It is the possible divergence
between the dimensions legality/illegality and legitimate/illegitimate that is
theoretically significant, because the resulting tension impacts on behavior. In
fact, as the divergence between legality and legitimacy grows, its practical
1
Admittedly, it is difficult to empirically separate legitimacy beliefs from beliefs about
appropriate behavior, and both from moral beliefs.
40
Illegal Markets
2
A literature survey on financial fraud has been conducted at the Max Planck Institute for the
Study of Societies (see Reurink 2016); in contrast to corruption, financial crime has not been a
popular topic for sociologists.
41
Renate Mayntz
corrupting actor’s economic survival. Economic gain is also the driving motive
in financial crime. In the typical case of financial crime, otherwise legal indi-
viduals (for example, traders in a financial institution, accountants in a corpor-
ation) commit formally illegal acts, either in their personal interest or for the
benefit of their organization. Perpetrators who identify primarily with their
organization will not necessarily consider their behavior to be illegitimate,
even though they are conscious of the fact that they are infringing a legal
rule. As is true of corruption, acts of financial crime tend to be kept secret.
Market actors may engage in corruption and commit financial crimes, but
this does not constitute illegal markets. Illegal markets are systems composed
of illegal market transactions. By definition, a market presupposes multiple
sellers or potential buyers, and market transactions are assumed to be volun-
tary on the part of sellers and buyers (see Aspers and Beckert 2008: 225f.).
There is a fluid boundary between voluntary and constrained engagement in
legal as well as illegal market transactions, but “selling” mafia protection to
enterprises is clearly extortion rather than a market transaction. The driving
motive in illegal markets is generally economic; some actors may simply seek
sustenance or even survival rather than profit.
The social acceptance (legitimacy) of formally illegal trades/markets varies
considerably. In social contexts of contested legality, where “the law,” whether
because of its source or its content, is not considered legitimate, the legal/illegal
boundary is only weakly drawn, and what is formally illegal may become
accepted everyday practice. The more diffused the perceived legitimacy of
formally illegal acts, the less is the felt need to hide them; examples are the
Argentinian market La Salada described by Dewey (2012), and the Open Eye
markets described by Nina Engwicht in her dissertation (Engwicht 2016).
Illegal markets can be conceptually distinguished more clearly from terrorist
organizations than from organized crime and mafia organizations. Illegal
markets differ from terrorist organizations in the main driving motive (eco-
nomic rather than political), in the type of social order or governance (market
versus organization), and in the role of physical violence. The market is
traditionally associated with peaceful exchange, and contrasted to violent
strife and war (for example, Hirschman 1977). Whereas violence, the spec-
tacular murder of uninvolved people, is a defining feature of terrorism (see, for
instance, Daase 2007), actual violence—in contrast to the threat of violence—
is a strategy of last resort in mafia organizations, organized crime, and even
more so in illegal markets. Terrorist organizations commit such crimes as
extortion, kidnapping, and bank robbery, but terrorism is also considered a
crime in itself. Terrorist organizations differ from organized crime in the
driving motive rather than the nature of their actions. While for criminal
organizations, extortion and drug trafficking are a source of profit, terrorist
groups commit these criminal acts to fund their political activities.
42
Illegal Markets
Illegal markets and organized crime are connected in so far as criminal organ-
izations specializing in car theft or art robbery act as suppliers to the correspond-
ing illegal markets. In fact, the distinction between illegal markets and organized
crime seems to turn mainly on a conceptual or classificatory distinction—the
difference between “illegal” and “criminal.” Not all illegal acts are violations of
criminal law and can thus be classified as crimes; illegal market exchange is often
in violation of trade law, not criminal law. Profit is the dominant driving motive
in illegal markets and in organized crime, and the same kind of good can
be involved. There are even similarities with respect to organization; criminal
“organizations” are often much more loosely structured than the term suggests.
In fact, the Oxford Handbook of Organized Crime has a whole section on illegal
markets (Paoli 2014). But illegal market activities are more likely to be socially
tolerated than the activities associated with organized crime—stealing, black-
mail, and extortion are generally judged to be morally wrong.
The Oxford Handbook of Organized Crime also has several chapters on mafia
organizations, treating them as one kind of organized crime among others;
obviously these classificatory categories overlap. The distinction between
mafia organizations and illegal markets is also difficult, although less for
semantic than for empirical reasons. Mafia organizations typically engage in
illegal market activities, but in mafia organizations the driving motive is not
merely economic. Mafia organizations try to establish a monopoly over several
types of illegal markets (drugs, prostitution, garbage, toxic waste disposal, and
so on) in a specific territory; the driving motive is thus both economic and
political.3 The means–end relation between profit and territorial power is
variable. In a given illegal system, the relative dominance (or rank order) of
the economic (profit) and the political (power) motive can change, and it may
be difficult to tell which is the means and which the end. It is basically the
means–end relation between the two—the dependence of economic gain on
territorial power and of power on money—that makes for their empirical
interrelation and the fluid boundary between illegal markets, mafia organiza-
tions, and organizations involved in armed conflict in civil wars.
All social action and action systems that are formally illegal are surrounded by,
and in constant interaction with, actors complying with and actors bent on
defending legal norms. Illegal markets interact with legal markets, and with
3
There is a vast literature on mafia organizations, including excellent sociological studies (for
example, Gambetta 1992; Sciarrone 2011) and documentary studies in the form of novels (for
example, Saviano 2006).
43
Renate Mayntz
4
I do not include hybrid phenomena among “interfaces.” Hybrid phenomena possess
“defining” properties belonging to both categories in a dualistic pair. If legality is formally
defined, there can be no genuine hybrids of legal/illegal.
44
Illegal Markets
informal norm of omertà, while the seller of a counterfeit Rolex watch decides
to violate a legal norm.
There is, secondly, a grey zone of phenomena that cannot be clearly assigned
to one specific category on the dimensions legal/illegal and legitimate/illegit-
imate. This can be due to a number of reasons. For one thing, as already
underlined, there are gaps in legal regulation, where actions can be judged
only by the legitimacy accorded to them, or more generally by their appropri-
ateness. In regulated areas, legal norms are often subject to interpretation.
When does “taking” become “stealing” in the legal sense, and making use of
an opportunity “cheating”? However, not only the legal, but also the social
definitions of cheating, stealing, and lying can be fluid and uncertain. Where
actions are not legally regulated, and where the legitimacy of a legally unregu-
lated action is unclear, the subjectively felt uncertainty is greatest.
Finally, there are actors who, at different times or in different situations,
engage both in legal and illegal actions, who are moving between two worlds,
acting legally and then again illegally, or the other way round. In the typical
case the actors themselves are generally law-abiding citizens, but occasionally
commit illegal acts. There is the honest businessman selling garments pro-
duced in mafia sweatshops in his boutique; the renowned firm that, off and
on, dumps (or allows the dumping of) its waste illegally; and the law-abiding
citizen giving shelter for a couple of days to a criminal on the run. Similarly,
the sympathizers surrounding a terrorist organization may on occasion render
active support, moving as it were between two worlds (Malthaner and
Waldmann 2012). In these cases, otherwise “legal” actors act illegally. But as
Nina Engwicht (2016) has shown, there is also the illegal trader of illegally
mined diamonds who sells them to a legal export firm, and the seller of
counterfeit goods who invests his profit in a legal business or legally buys an
apartment.
The close empirical connection between illegal markets and terrorist organ-
izations, mafia organizations, and what is called organized crime is reflected
in the difficulties—evident in the third section of this chapter—involved in
distinguishing between them conceptually. The conceptual boundaries
between these different types of illegal action systems are fluid. Interfaces,
however, are real social phenomena that can be empirically established, even
where they are subjective, as are beliefs. The term “interface” can refer to
phenomena (both actions and social systems) that are formally illegal, yet
considered to be legitimate, or legal yet considered to be illegitimate; it also
refers to phenomena whose legality and/or legitimacy is open to interpret-
ation, and to actors participating with their actions in both a legal and an
illegal system. Actors who move between two distinct social worlds serve as
linking pins between them. Ambivalent phenomena force actors to make
choices, blurring the hard edges of social categories. These kinds of interface
45
Renate Mayntz
bind together what is socially distinct, provide scope for innovative action,
and permit flexible adaptation. Grey zones can create tension in everyday
behavior; they are also a challenge for legislators, and thus a source of insti-
tutional change. Selling complex CDOs to speculate on expected losses did
not infringe any legal norm and was accepted practice before the recent
financial crisis, but has come to be considered illegitimate, and may become
illegal in the course of regulatory reform. The boundaries between legal/illegal
and legitimate/illegitimate are not stable: they shift. The observation of inter-
faces between legality and illegality, stimulated by the study of illegal markets,
alerts us not so much to the dark side of the social world as to the many shades
of grey that lie between black and white.
References
Aspers, Patrik, and Jens Beckert. 2008. “Märkte.” In Handbuch der Wirtschaftssoziologie,
edited by Andrea Maurer, pp. 225–46. Wiesbaden: VS Verlag.
Beckert, Jens, and Frank Wehinger. 2013. “In the Shadow: Illegal Markets and
Economic Sociology.” Socio-Economic Review 11(1): pp. 5–30.
Daase, Christopher. 1999. Kleine Kriege—große Wirkung: Wie unkonventionelle Kriege die
internationale Politik verändern. Baden-Baden: Nomos.
Daase, Christopher. 2007. “Terrorismus als asymmetrische Gewaltstrategie.” In Terror-
ismus und Rechtsstaatlichkeit: Analysen, Handlungsoptionen, Perspektiven, edited by Kurt
Graulich and Dieter Simon, pp. 91–9. Berlin: Akademie Verlag.
Dewey, Matías. 2012. “Illegal Police Protection and the Market for Stolen Vehicles in
Buenos Aires.” Journal of Latin American Studies 44(4): pp. 679–702.
Dewey, Matías. 2016. The Organization of Market Expectations beyond Legality: Towards
New Distinctions in Luhmann’s Theory of Systems. Unpublished manuscript. Cologne:
Max Planck Institute for the Study of Societies.
Engwicht, Nina. 2016. “After Blood Diamonds: The Moral Economy of Illegality in
the Sierra Leonian Diamond Market.” MPIfG discussion paper 16/9. Cologne:
Max-Planck Institute for the Study of Societies.
Gambetta, Diego. 1992. La Mafia Siciliana. Torino: Einaudi.
Hart, Keith. 2010. “Informal Economy.” In The Human Economy, edited by Keith Hart,
Jean-Louis Laville, and Antonio David Cattani, pp. 142–53. Cambridge: Polity Press.
Hirschman, Albert O. 1977. The Passions and the Interests: Political Arguments for Capit-
alism before Its Triumph. Princeton, NJ: Princeton University Press.
Luhmann, Niklas. 1983. Legitimation durch Verfahren. Frankfurt a.M.: Suhrkamp.
Malthaner, Stefan, and Peter Waldmann (eds). 2012. Radikale Milieus: Das soziale Umfeld
terroristischer Gruppen. Frankfurt a.M.: Campus.
March, James G., and Johan P. Olsen. 2006. “The Logic of Appropriateness.” In The
Oxford Handbook of Public Policy, edited by Michael Moran, Martin Rein, and Robert
E. Goodin, pp. 689–708. Oxford: Oxford University Press.
46
Illegal Markets
47
Part II
Secrecy and Illegal Markets
3
Introduction
In the 1960s and 1970s the issue of commercialization in the field of trans-
plantation was not a matter of general concern. The first successful kidney graft
between two homozygote brothers was done in a research hospital in Boston in
1957. Subsequently, the surgical technique and its associated complex post-
operative procedures were progressively applied to other patients and also
different organs. The turning point came at the beginning of the 1980s with
the discovery and management of Cyclosporine, a new drug capable of pre-
venting the rejection of a grafted organ by the body of the recipient. Unfortu-
nately, medical success prompted concern about the availability of a sufficient
number of organs—I shall limit myself to kidneys, which are the most import-
ant organ for transplantation and the most common organ involved in illegal
transactions—for the growing number of patients waiting for a transplant
(Steiner 2010: chapter 3). Until the mid-1980s there were few reasons to ban
the selling of human body parts for transplantation: such operations were
mostly unsuccessful, few in number, and done in research hospitals with public
funding; commercialization was therefore pointless. Cyclosporine was a game
changer: suddenly, kidney transplantation became a successful medical tech-
nique that could save the lives of people suffering from end-stage renal failure.
Commercialization became an issue.
Two events brought the issue of commercialization to the fore in the
medical and political worlds: the entrepreneurial activities of Dr. Harvey
Jacobs, and the behavior of wealthy patients.
In 1983, Dr. Jacobs contacted several hospitals in the United States, offering
to provide them with kidneys bought from foreign sellers by his company
(Kidney International). This offer triggered an immediate response from the
political world, notably from Al Gore, a congressman specializing in new
technologies, who acted swiftly to bring about a ban on market transactions
for the purposes of transplantation (Gunby 1983). Accordingly, the National
Organ Transplantation Act was passed in October 1984, clarifying the legal
status of organs and outlawing their commercialization in the United States.
At about the same time, but far from Washington, significant commercializa-
tion of transplant surgery began, involving wealthy patients from the Arabian
Peninsula and India. This prompted concern in the transplant community,
which reacted negatively to this commercial development, and proposed
ethical guidelines in major professional journals (Lancet and Transplantation,
in 1985 and 1986, respectively). Major international changes to the laws
regulating living transplantation in South America and Europe (USSR
included) followed these developments. These legal changes demonstrate
that, before 1984, specific issues related to living organ procurement and the
possibility of the commodification of human body parts in transplantation
52
Secrecy and Frontiers in Illegal Organ Transplantation
were not part of the legislative framework in many countries. Only 40 percent
of the legislation relating to transplantation passed before 1984 banned the
commodification of kidneys. There was a dramatic shift after new US legisla-
tion was passed in 1984: 75 percent of legislation now banned the commodi-
fication of human body parts, about twice the proportion in the previous
period. Countries in which there was legislative activity in both periods
confirm the trend because, with the exception of Venezuela, all these coun-
tries added specific sections banning such commodification in their post-1984
legislation (Steiner 2015: 264–6). Since then, there have been important
moves to extend the ban on commodification, notably the Palermo Protocol
adopted by the United Nations in 2000 to “Prevent, Suppress and Punish
Trafficking in Persons, especially Women and Children” and more recently,
in 2008, with the Declaration of Istanbul “On Organ Trafficking and Trans-
plant Tourism,” which has been endorsed by more than 100 medical organ-
izations to date. This illustrates the key role of the state in making illegal the
market in organ transplantation and, because the ban must be international to
be effective, it also illustrates the role of non-governmental organizations in
producing the necessary coordination between legislative decisions.
Nevertheless, the mere possibility of organ trafficking was, and probably still
is, sufficiently strong to play a part in the introduction of new legislation. The
rationale is the following: “When there are so many rich patients waiting for a
kidney, when there are so many poor people desperate for cash, then there is
organ trafficking.” In more technical terms, the spread between what the rich
are ready to pay for a kidney and what the poor are ready to accept for selling
their kidney is so large that trafficking can easily intervene and offer an illegal
transaction to both parties, together with hefty profits to the broker and the
surgeon. This narrative can be heard not only among European surgeons, but
also in political discussion, as illustrated by the French parliamentary debate
on the bioethical law regulating organ transplants. In his opening speech,
Jean-Yves Le Déault stated that organ trafficking was a special concern for the
members of the parliamentary committee examining ethical issues in advance
of public debate in the French parliament. The committee stressed the neces-
sity of suppressing this odious form of commerce;1 but Le Déault did not give a
single real example of such trafficking. The same thing happened when
Bernard Kouchner, a former physician and at the time Minister of Health,
warned in a speech to deputies that a central aim of the bioethical law was the
prevention of a situation in which men and women were driven to sell one of
their kidneys in order to make a living. Throughout these lengthy debates
organ trafficking was no more than a fear or a dread, but all the same powerful
1
Journal Officiel, Assemblée nationale, November 19, 1992, p. 5721.
53
Philippe Steiner
2
According to Robert Merton, William Thomas asserted the following: “If men define situations
as real, they are real in their consequences.”
3
Proudhon argued that capitalists secured profit for themselves because they only paid the
wages of individual workers, not for the value created by workers acting together as a collective
entity (a team). Profit therefore originated in the wealth created by workers as a collective group,
but was appropriated by the capitalist (Proudhon 1926 [1840]: 215, 217).
54
Secrecy and Frontiers in Illegal Organ Transplantation
social sciences treat the market primarily as a legal institution. This is also true
of Max Weber’s standard definition of profit making in a market economy,
where there is a marked emphasis upon the peaceful pursuit of economic
activity:
55
Philippe Steiner
the French Civil Code states that a contract must meet four conditions to be
effective: consent, capacity to contract, object of the contract, and licit cause.
Consent is considered in a series of articles (from Art. 1109 to Art. 1122)
explaining what happens when consent is obtained by fraud, violence, or
error. Violence inflicted upon a contracting party nullifies the contract (Art.
1109); this is also the case when violence is not inflicted by the other con-
tracting party (Art. 1111), or when a relative of the contracting party suffers
violence (Art. 1113). However, the issue of violence is far from simple, because
there are different conceptions of what is meant by violence in the context of
contracts.
When a market is declared illegal for a given area, illegal transactions are
associated with violence (Chimeli and Soares, 2011) even if, most of the time,
illegal transactions occur without actual violence (Andreas and Wallman
2009: 225–6); the ever present threat of violence is sufficient to bring about
a substantial modification of the rules of exchange. Where there are no legal
means of resolving disputes between transacting parties, violence, or the
threat of violence, plays a central role. The level of violence may be high, as
is the case with the production and distribution of drugs in Mexico, which
seems to follow the lethal logic of the escalation of violence that Clausewitz
identified. It may be weak, as with illegal clothing transactions on La Salada
place in Buenos Aires (Dewey 2014), or the sale of stolen cars in the same city
(Dewey 2012). Nevertheless, in these situations violence supports the illegal
order of the exchange arena, in the form of the bribery and corruption of
street-level bureaucrats and policemen.
This dimension of violence is recognized by the international institutions
and conventions that regulate the procurement of human organs. According
to the UN Palermo Protocol’s Article 3(a), trafficking in persons is defined as:
This is a general statement in which the issue of organ removal is only one
element; it is thus useful to also consider the Istanbul Protocol, which specif-
ically addresses the issue of organ trafficking, defined as:
56
Secrecy and Frontiers in Illegal Organ Transplantation
position of vulnerability, or of the giving to, or the receiving by, a third party of
payments or benefits to achieve the transfer of control over the potential donor,
for the purpose of exploitation by the removal of organs for transplantation.
Secrecy
Secrecy is crucial here, as it is in many other illegal transactions (see particu-
larly Palan’s chapter in this volume) because the conduct of illegal transac-
tions requires that their existence be concealed, although some aspects can be
performed openly.
Secrecy means that there is a social divide between those who know that
illegal transactions are being carried out and how they are carried out—to a
great extent, at least. Secrecy covers a range of social relations, as exemplified
by Simmel’s chapter on this issue (Simmel 1999 [1908]: chapter 5). It is first of
all a general form of behavior without which social life would be almost
impossible, because social intercourse is made difficult if a participant provides
full and open access to all information about themselves and their activities.
This form of secrecy involves “fragmentary knowledge,” or secrecy as “discre-
tion.” But in other cases secrecy gives rise to secret societies in which members
are expected to adopt a strategy of “dissimulation,” hiding from non-members
their participation in secret activities, any breach of dissimulation being
considered a “betrayal,” putting the traitor in jeopardy. In Albert Hirschman’s
language, “defection” is a strategy that is difficult and dangerous to imple-
ment (Hirschman 1970). Obviously, secrecy is also present within legal mar-
kets; there is “business confidentiality,” notably concerning the intangible
resources contributing to the efficient functioning of a firm not protected by a
patent. This last category of secrecy differs from that attached to illegal trans-
actions, because it is possible to regulate and control the former by law,
whereas the latter is regulated and controlled by the threat of violence. They
also differ in the following sense: business confidentiality involves a degree of
secrecy that is openly acknowledged; it may even be explicitly stated in the
employment contracts of those with access to confidential information, not-
ably in the case of a CEO who, after leaving a company, is not allowed to work
for competitors for a given period. By contrast, secrecy in illegal transactions is
most effective when the existence of secrecy is itself secret. In that situation
the functioning of illegal transactions is a first-order secret; second-order
secrecy means that the existence of illegal transactions is not known. This
second-order secrecy reduces the risk of investigations, and illegal transactions
are thus easier and safer to undertake. The work of concealment necessary
to produce secrecy and, better, a secret secrecy, is thus a crucial element of
57
Philippe Steiner
Frontiers
The existence of a legal frontier between what is permitted and what is not is
linked to a social frontier between those who know the existence and function-
ing of these illegal transactions and those who do not. Different sets of people
occupy this social frontier: first, there are those in charge of preventing or
containing illegal activities; in the opposite camp there are members of illegal
organizations or networks who secure their operations from the activities of
“traitors” who jeopardize the smooth functioning of illegal activities. There
are also many people moving back and forth between these two worlds on a
regular basis, for illegal activities usually need to be connected to legal activ-
ities. This happens when illegal goods are to be sold—for example, drugs—or
legal goods are to be obtained with illegal means (for example, smuggled
tobacco) to customers who otherwise live in the legal world. This also happens
when the money accruing to those who benefit from illegal transactions has
to re-enter the legal world through some form of money-laundering activity.
Insofar as illegal transactions are aimed at profit making, the use of money
becomes almost unavoidable; and as Simmel noted, money is an absolute
means: money facilitates illegal transactions because it is a compressible,
abstract, and arms-length device (Simmel 1999 [1908]: 370), so that large
sums can be sent to someone far away without there being any taint related
to its illegal origins.
Simmel is of course right; but we need to add a qualification to gain a full
picture of what happens at the frontier. In many cases, illegal transactions are
conducted as a business, which means the existence not only of a secret
society or network, but also the existence of some form of organization.
Organizations need a great deal of information, and ways of storing that
information to keep a memory of what happened in previous transactions,
and/or to plan future ones. Hence there is also what I would call a material
frontier, where things are recorded in files before being translated from
the illegal world to the legal one, and vice versa. There are many things to
store, hide, and translate: money, personal data, nationality, organizational
records, and so on. Each item raises different issues and needs specific forms of
secrecy, preventing outsiders from understanding that illegal transactions are
4
This work is the opposite of the work that has to be done to meet the rules of exchange, one of
the four institutions in accordance with which market exchanges are possible in Neil Fligstein’s
conceptualization (Fligstein 2001: chapter 2). The key difference is that concealment work seeks to
escape the legal rules, and not to implement them; however illegal and legal markets are
intertwined, both must be performed.
58
Secrecy and Frontiers in Illegal Organ Transplantation
59
Philippe Steiner
5
See for example Prasad et al. (2006) and Sajjad et al. (2008). The medical outcome of these
illegal transplantations is not so significantly different from legal ones.
6
The HOTT project (<http://hottproject.com/home.html>) was created at the initiative of the
Erasmus Medical Center Rotterdam (Netherlands), Lund University (Sweden), the Bulgarian Center
for Bioethics (Bulgaria), and the Academic Society for the Research of Religion (Romania). The
project aims at studying “Trafficking in Human Beings for the Purpose of Organ Removal” in order
to increase public awareness. The HOTT project receives financial support from the Prevention and
Fight against Crime Program of the European Commission.
60
Secrecy and Frontiers in Illegal Organ Transplantation
Violence
In the case of organ transplantation, some philosophers who are influenced by
a libertarian conception of freedom consider consent to be effective even
when given by a man being threatened with a gun—the man would always
have the option of choosing death rather than giving his consent (Taylor
2005: chapter 3). This position is rather extreme, but Taylor insists that if
one accepts violence as a sufficient cause for nullifying a contract, then many
workers could claim that their consent to work is tainted with violence, or the
prospect of dying from starvation. This formal view of law and violence is
challenged by material perspectives which distinguish illegal violence from
that which is deemed legal. Contrary to the “flat earthism” of the economistic
libertarian view, social conventions distinguish between a man constrained to
work under the threat of hunger and a man constrained to work under the
threat of a gun. Furthermore, whatever libertarian philosophers might main-
tain, most societies distinguish between selling one’s work and selling a part of
one’s body.
In the present case, violence is directed mainly to the sellers. What is meant
by violence here? Direct physical violence is barely mentioned; violence is
more indirect since, most of the time, it is related to poverty aggravated by
indebtedness in countries where there is no safety net beyond that provided
by family members. Violence takes the form of duress, biased information,
straightforward lies, and deductions made from the payment promised before
the kidney is sold. Fieldwork done in Egypt and India has highlighted two
different situations. In Egypt, where a ban on the commercialization of kid-
neys is not enforced because of the high level of corruption in the country,
most transplants involving a living donor are tainted by illegal arrangements
for compensating the donor through the extended family. Besides these illegal
transactions between Egyptian citizens, illegal Sudanese migrants are coerced
into selling a kidney (Coalition for Organ-Failure Solutions 2011: 7, 10).
Because of their illegal situation few of them—actually twelve out of fifty-
nine victims identified—agreed to testify, for fear that their participation in an
illegal transaction would incriminate them. The approach taken by brokers is
described by one of the sellers:
I left Sudan after suffering from prison and torture there . . . I met a friend in Sudan
who advised and helped me get to Egypt. He took care of everything in Sudan,
obtaining a passport and the procedures. I flew to Cairo and met him again and
stayed with him and his family in his apartment in Cairo. After some weeks his
family stopped feeding me. I had no money for food and I began to fall ill. He then
told me that I needed to sell my kidney to raise money for my stay and help my
situation.
(Sudanese seller quoted in Coalition for Organ-Failure Solutions 2011: 15)
61
Philippe Steiner
This story, among many others, describes what can be called a capture process,
in which the victim is initially assisted, but then channeled into a situation
into which they are trapped because they have no money, no job, and a debt
to the former “helper,” and thus no other alternative than selling a kidney. In
some other cases violence is more direct, the “helper” managing to obtain the
kidney without the consent of the Sudanese migrant:
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Secrecy and Frontiers in Illegal Organ Transplantation
A Malayalam [an Indian language mainly from the south of the country] lady
asked me to give my kidney to her husband when I was working as a maid in her
home. She gave me Rs 1 000 [about 20 US dollars] as my salary after they took my
kidney.
(Two women sellers in India quoted in Coalition for
Organ-Failure Solutions 2014: 32)
What about the buyer? Violence is not a relevant category for them. Instead,
the HOTT report devoted to the people who travel abroad to buy a kidney
transplant stresses the fact that contact with a broker is barely mentioned, and
none of them complained about violence (Ambagtsheer et al. 2014b). Usually
buyers were told that there was a chance of obtaining a transplant abroad by
their family or their friends; some of them arranged the connection with the
medical facility and even helped to cover the cost. It is important to bear in
mind that in a significant number of cases these buyers are returning to the
country in which they were born and where they still have close family
members.7 This is the case of three Swedish patients (from the five people
interviewed), one from Iraq, and two from Iran, all of whom went back to their
mother country to get a transplant. This is legal for an Iranian citizen; and this
is also the case with four patients from the Netherlands who went back to their
mother country to get a transplant (one to China and three to Pakistan).
In order to go beyond these remarks about the violence suffered by the
seller, it is necessary to consider a morphological dimension of these illegal
transactions that, without exception, involve people coming from different
countries. Globalization is a key element of illegal transactions in the domain
of kidney transplantation.
Globalization
The existence of illegal transactions involving actors distributed among many
countries means that these transactions are global, as is the case for the
majority of market exchange in our current globalized economic world. The
global dimension is also evident when we consider the legal framework that
could prevent or at least contain these illegal transactions (Cohen 2015), as is
also the case with the legal framework necessary for the smooth functioning of
market exchange—consider, for example, how complex it is to develop inter-
national laws relating to bankruptcy (Halliday and Carruthers 2009). How-
ever, it is still necessary to distinguish between market exchanges and illegal
transactions.
7
About 33 percent of the twenty-two patients interviewed are of this kind; if we add patients
going to a country close to their own mother country (for example, Colombia–Curacao, Sri Lanka–
India, Iraq–Pakistan), then the percentage rises to 41 percent.
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Philippe Steiner
64
Secrecy and Frontiers in Illegal Organ Transplantation
Patient–Buyer B B A B
Seller B A B C
Surgeon A A A A
buyer and seller must come to the hospital in which the surgeon is working.8
Case 1 is typified by the initial phase of the Netcare Case, when from 2003 to
2010 a series of illegal transactions took place where both the buyer and the
seller traveled from Israel for an operation in Durban, South Africa carried out
in one of the largest healthcare groups, Netcare. This was also the initial
modus operandi in the Rosenbaum case. Rosenbaum was a broker who oper-
ated from 2001 to 2009, offering Israeli organ donors to patients and helping
them coordinate a cover story so that they could deceive hospital staff in
different parts of the United States. The second case differs from the Netcare
case, in which the seller and the surgeon are from the same country, and the
buyer is the only person moving back and forth. This case is not mentioned in
the HOTT report. The third case is illustrated by the Rosenbaum case during its
final phase, when Israeli sellers came to the United States to sell a kidney to
patients from the orthodox Jewish community. The third case is certainly the
most common. It is important to bear in mind the fact that people move in
and out of the country in which the illegal transplant occurs. Brazilian sellers
come back with only one kidney and several thousand US dollars which are
supposed to change their lives in their home country, while the Israeli buyer
returns with a grafted kidney in order to receive drugs and the post-operative
follow-up, and a significant subsidy from the government and the health
insurance company. Finally, the fourth case covers the Netcare case and the
Medicus Clinic case (the name of a privately run clinic performing illegal
kidney transplantation in Priština, Kosovo in 2008).
These cases illustrate the role of discrepancies between national legislations:
Iran has had a legally regulated market for kidney transplantations since 1987,
and the first Israeli law prohibiting brokerage in kidney transplantation was
passed only in 2008.9 Other countries are notoriously corrupt, offering many
exploitable loopholes for brokers and surgeons eager to make money from
illegal transplantations. Furthermore, this also explains how these illegal—or
8
It can happen that a surgeon will escort one of his patients traveling abroad for a transplant, as
was the case with some Israeli surgeons in the 1980s (Friedlander 2002).
9
According to Zvika Orr this law is rather ambiguous, the prohibition being quite mild with no
punishment for those who buy and sell kidneys, and fairly light punishment for the broker
(maximum imprisonment of three years, or a fine of up to 44,000 euros) (Orr 2014: 43).
65
Philippe Steiner
10
The features common to both groups are highlighted by the Italian micro-historian Carlo
Ginsburg in his “evidential paradigm” (Ginzburg 1980; see also Boltanski 2012), which directs
attention to apparently minor evidence through which the real action or the real actor lurking
behind the scenes can be identified.
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Secrecy and Frontiers in Illegal Organ Transplantation
Conclusion
67
Philippe Steiner
from hand to hand, and there is no reason to think that market exchanges
should be treated as the appropriate model or benchmark for other forms of
transaction (Steiner 2016: chapter 5).
Markets are characterized by competition, anonymity, and free movement:
competition is a form of peaceful struggle between parties that concludes
with a contract in which reciprocal obligations are agreed, including the fact
that any future disagreement will be settled in a given jurisdiction, and
involving the transfer of property rights. Exchange is conducted under a
logic of anonymity, so that customers are not differentiated by their personal
traits, these being irrelevant to their capacity to meet their market obligations;
people may enter or leave the market at will according to the old motto
of economic liberalism: “laissez-faire, laissez passer,” once legal provisions are
taken into account. Illegal transactions are organized according to a different
set of characteristics: violence, secrecy, and frontiers. The existence of frontiers
appears to be the central sociological element for understanding how illegal
transactions are processed. Concealment work is thus necessary to the main-
tenance of secrecy, without which flows of resources and people cannot move
from the illegal to the legal worlds, and vice versa. It is also a key element in
the complex process through which illegal transactions can be linked with the
legal world of exchange, as exemplified by those illegal transactions in organ
transplantation that were recently documented.
References
Ambagtsheer, Frederic, Martin Gunnarson, and Jessica de Jong et al. 2014a. “Trafficking
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4
Introduction
1
This chapter is based on research funded by the European Research Council under the
European Union’s Seventh Framework Programme (FP7/2007-2013)/ERC Grant agreement n
283873 GTICO.
What Is Grey about the “Grey Market”?
such as these may be only foggy, in that a correct interpretation is possible but
hard to discern, or more genuinely grey in that the law, ethics, or social
normativity in fact do not provide definitive guidance.
As well as questions of interpretation of the meaning of action, greyness can
be used to signify a mixing of two types of black/dirty and white/clean things;
for example, grey water for recycled household use is neither clean nor
entirely tainted. In a similar vein, researchers speak of a grey literature,
which is neither openly published nor entirely restricted from access upon
request or negotiation. This includes the internal institutional reports of
bodies such as government departments or the police. Grey can thus mean
“neither one thing nor the other” in the context of mixed origins of constitu-
ent parts, or in the context of residing in a social realm that is neither fully
public nor private.
Finally, we should distinguish from our discussion the economic use of the
term “grey market,” which is the normal use of the term. In discussions of
international trade, a grey market in this usual sense is a parallel market.
Parallel markets are not illegal, but the objects they move are unauthorized
for sale in a particular jurisdiction by their manufacturers, who have devel-
oped different versions of the product for different global markets. Grey
imports of cars, for example, may produce problems for consumers who find
their vehicle to be unsupported by a national network of dealers and parts
providers in a jurisdiction in which the car was never intended for sale. There
are other versions of grey or parallel markets along these lines, but we do not
need to go into detail here as the point is simply to note that the developed use
of the term “grey market” to refer to the international trade in antiquities is at
odds with the usual use of the term in the literature on international trade
from the perspective of the disciplines taught in business schools.
Two dimensions of the interfaces between legality and illegality in markets
that the editors draw out in their introduction to this book are (i) that defin-
itions of legality and illegality are contested in the social practices of market
actors, and (ii) that the distinction between legality and illegality is compli-
cated by the intermingling of both types of activities in markets. These pro-
positions map roughly onto a threefold distinction, which we will argue for in
this chapter in relation to understanding the illicit antiquities trade as a “grey
market,” building on the general observations about greyness laid out above.
That distinction is between: (a) an uncertainty or contest in the ethical, legal,
or normative construction of the issue, (b) the practical mixing of licit and
illicit chains of supply, and (c) the changing social/market and legal classifi-
cation of individual artifacts as they are laundered through multiple transac-
tions and jurisdictions over time. In summary, then, both of the editorial’s
dimensions of interfaces between legality and illegality are well reflected in
studies of the global antiquities market.
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Simon Mackenzie and Donna Yates
In respect of the first point, there is illegality at each stage of the market (at
source, in transit, and in terms of trade and collection in market countries).
Archaeological looting is a criminal offence in most source countries, cross-
border trafficking will usually breach a number of legal provisions, and trade
in the international marketplace with knowledge or serious suspicion of illicit
origins will also usually constitute a crime (Prott and O’Keefe 1984, 1989).
There can be no doubt that the international legal regime and its constituent
domestic jurisdictional parts consider trade in illicit antiquities to be illegal.
However, at all of the stages of transaction there are deviance-normalizing and
neutralizing engagements with the issues exercised by the actors and constitu-
encies involved.
Looters have in some texts been characterized as “subsistence diggers” (e.g.
Matsuda 2005), drawing them directly into line with the discourse the editors
of the present volume identify as “survival strategies,” in respect of which they
suggest tolerance has been increasing since the financial crisis. It has even
been argued that we should recognize looting as a moral and human right
“where there is no viable alternative economic means for subsistence diggers
to access their human rights to clean water, food and medicine” (Hardy 2015).
One can equally, however, find studies that debunk this construction of
looters working only to put food on the table. In recent known cases it is
clear that the looters were career criminals, close enough to accepted defin-
itions of organized criminals to merit discussion in those terms (Mackenzie
and Davis 2014; Felch and Frammolino 2011).
In the cross-border trafficking phase we find the value and purpose of
export restrictions disputed by market-oriented “cultural internationalists”
(Merryman 1986). Source states are considered “retentionist” by these neo-
liberal commentators, who would like to see cultural property the subject of
worldwide free trade. They consider export prohibitions to be a causal mech-
anism in the formation of international black markets in cultural property,
since by restricting the buying pool only to national collectors, export con-
trols create a situation where higher prices are available for antiquities or
significant artworks outside the jurisdiction in which they can be legally
sold (Bator 1983).
Finally, in the international marketplace, it is clear that high-end antiquities
buyers contest some of the premises upon which the current legal regime is
based, and engage in practices of “creative compliance,” which use the letter
of the law to defeat its spirit (McBarnet 2003). Less clear is whether this reflects
a genuine clash of values, or something more like a process of Matzian
neutralization (Matza 1964), where the general ethical and normative value
structure underpinning the governance of trade in antiquities is largely
accepted but traders engage in occasional moments of drift where they are
temporarily dislocated from conventional normativity and open to the
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What Is Grey about the “Grey Market”?
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Simon Mackenzie and Donna Yates
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What Is Grey about the “Grey Market”?
perceptions of security. Antiquities are tangible objects but they often serve as
a physical manifestation of intangible concepts that underlie the social fabric
of local and descendant groups. Threats to these objects are felt as threats to
culture, and the trafficking of antiquities to Western markets, especially in
post-colonial situations, is interpreted as a racist challenge to indigenous
sovereignty and cultural dignity. It outwardly confirms the lived experience
of social inequality between the developing and the developed world.
There is incredible variation in the structure of antiquities trafficking. It can
range from objects passing through numerous countries and changing hands
many times before ultimately being sold to a collector or museum (for example,
the Cambodian statue-smuggling networks described by Mackenzie and Davis
2014), to situations where the object passes through no hands, with the
collectors themselves digging up the artifact, transporting it, and keeping it
(for example, the “pothunters” who loot Native American sites in the south-
western United States). That said, it is possible to present common features seen
in various antiquities trafficking networks and cases.
At source, “looters,” meaning the people who actually dig antiquities out of
the ground, are often poor locals with few other economic options. They may
take significant risks to locate sellable artifacts: there are many cases of looters
dying in cave-ins or from suffocation, and they are also the group in the
trafficking chain most likely to be caught and prosecuted. For their efforts,
they are paid a derisory percentage of the final sale value of the antiquities
they find (Brodie 1998).
Because antiquities that come from archaeological sites are unknown before
they are looted, there are no official records of their existence. That, coupled
with the remoteness of many archaeological sites, makes it incredibly difficult
to protect against or even detect archaeological looting. How does a country
protect an archaeological site that it does not yet know exists? Furthermore, as
many archaeologically rich countries are located in the developing world, the
systematic and structural deficits of local and national authorities may allow
antiquities trafficking networks to function. Underfunded, ineffectual, or
corrupt police and customs abet all kinds of commodities smuggling, antiqui-
ties among them (Yates 2014a, 2014b).
Thus at source, the model antiquities network would be economically
marginal locals digging at a nearby, poorly protected archaeological site.
They would then sell their finds to an in-country broker or intermediary
with connections to corrupt inspection or enforcement authorities, who
could be paid to look the other way when the objects are exported.
During the transit phase of antiquities trafficking, objects follow routes based
on the nature of the objects themselves and the needs of both the intermediaries
and the ultimate buyers. In some cases, antiquities are moved directly from their
country of origin to their country of sale: carried on flights, driven overland
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Simon Mackenzie and Donna Yates
across a border, or shipped/posted. In other cases the objects are moved through
one or more “transit ports,” which physically distance the pieces from their
illicit origins and, at times, result in the acquisition of import/export paperwork
that supports the impression of legitimacy (Polk 2000).
Paperwork, then, is an important part of the transit stage. False customs
declarations may allow shipments of antiquities to pass through customs
checks. Valid paperwork for legally exportable antiquities may be used to traffic
other antiquities that are not exportable (Kersel 2006). Weaker import restric-
tions in transit ports may result in antiquities that were illegally exported from
their countries of origin acquiring legitimate export documentation as they
pass through on their way to their final market. This documentation may be
used later to create a false provenance narrative.
During transit, the model antiquities network would see the source end
intermediary shipping the pieces through one or more transit ports on the
way to the final market country. Export documentation for the pieces would
list them as modern handicrafts or replicas and such replicas might be mixed
in among the authentic artifacts. An official in the country of origin may have
been bribed. The antiquities may seem to move in a nonsensical path (for
example, from Egypt to Thailand to Dubai), but the path represents both
known security weaknesses and differences in import and export regulation
in each country. At each transit port, the shipment would obtain legitimate
import and export documentation, which would eventually ease its transition
into the ultimate market country where a suitable paper trail becomes useful
in selling the item. In an alternative model a carrier might put an artifact in
their cabin luggage, get on a plane, and bring it into the market country
through security checkpoints that are screening for guns, not antiquities.
After the transit phase we move to the market phase, where antiquities enter
the wider art market, usually in relatively wealthy developed-world countries
that have either a long tradition of antiquities collecting (Western Europe,
USA) or an elite class with significant spending power (China, UAE). It is at
this stage that documentation acquired during the antiquities-trafficking
process may be converted into a false provenance to allow for public sale.
For example, a freshly looted artifact that passed through Switzerland on its
way to being sold in New York might be presented to buyers as “property of an
anonymous Swiss collector,” with the implied understanding of “old money”
selling off artifacts that were collected before restrictions were put in place.
False provenance, then, is a narrative that casts a dodgy artifact as legitimate
and is accompanied by the minimal amount of fraudulent or misleading
paperwork needed to allow the piece to pass into the art market.
The model market end of the antiquities-smuggling chain, then, is where an
artifact is exported from a transit port into a market country along with
whatever paperwork it has acquired. The receiver of the piece is likely to be a
76
What Is Grey about the “Grey Market”?
high-level intermediary or dealer who may know or at least suspect the illicit
origins of the piece, and who participates in the elite circles of the art market.
That dealer then offers the piece for sale either quietly to private buyers or by
consigning it to public auction. The dealer will say the piece was in an old
family collection in a plausible foreign country, supporting this either with
the available paperwork or with a persuasive but false narrative. The buyer
may or may not believe this false provenance, but it will be considered
sufficient for sale. The piece will be sold, sometimes along with a certificate
of authenticity, but not a certificate of legality.
While the specifics of how the antiquities market can be considered “grey”
will be discussed in the following sections, it is worth noting in preliminary
observations and context for that discussion that there are several features
particular to this trade that can be seen as facilitating the process of greying.
Research has identified certain individuals who, due to their position at the
nexus between what might be termed the “black” and the “white” market for
antiquities, allow for the functioning of the entire smuggling network.
Termed “Janus figures” (Mackenzie and Davis 2014), these intermediaries are
able to transition looted antiquities from their dubious origins into the high-
class world of art sales through their connections on both sides. The Janus
figures know at least some details about the looting and smuggling of the
pieces and they know at least some details of their subsequent high-end sale:
like Janus, they look in both directions.
The art market is traditionally opaque. Despite the large sums of money that
change hands, the market functions on the basis of trust and reputation, not
asking too many questions. This reflects an unspoken understanding that
sales of art reflect the financial state of the wealthy sellers and an understand-
ing that such financial matters are private. Thus art and antiquities sales are in
effect somewhat “back-door,” with no public record of the buyers and sellers
that are connected through dealers. Even at public auction, both consigners
and buyers are able to remain anonymous. In other words, it is an art-market
tradition not to ask who is selling an antiquity, why they are selling it, or
where they got it from.
There is no requirement that antiquities sale details be made public in most
countries or to provide proof to buyers that an antiquities sale is legal. While
there are various guidelines on good practice in codes of ethics and laws in
various jurisdictions, there is no universally accepted standard for what con-
stitutes seller or buyer due diligence when it comes to the ownership and
import/export history of antiquities. The art market trains participants to not
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Simon Mackenzie and Donna Yates
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What Is Grey about the “Grey Market”?
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What Is Grey about the “Grey Market”?
untaxed economy taking place outside the purview of official scrutiny rather
than, as in the case of antiquities, a shadow that interfaces and ultimately
merges with the formal, taxed supply chain. Criminologists, sociologists,
anthropologists, and economists have produced a considerable wealth of stud-
ies of a wide variety of markets that all suggest that where there is legal trade
there will be an undercurrent of illicit activity which interfaces with it and
exploits the profit opportunities it presents (Naylor 2004a, 2014b, 2010;
Ruggiero 1997; Passas 2003). In the present volume alone we can see plenty
of examples of this in the studies of markets in diamonds (Engwicht), wildlife
(Hübschle), organs (Steiner), and fake goods (Endres).
Thus a definition of greyness that places grey markets somewhere between
the wholly black and wholly white is redundant, since so many purportedly
legitimate markets are probably grey in that sense, although some will be
more so than others. More sense and usefulness can be made of this “mixing
streams” idea when we combine that type of greyness with the others covered
below.
Interestingly, this argument presenting the market as grey due to mixed
supply is used by both supporters of an unregulated trade in antiquities and
supporters of tighter regulation or bans. Pro-market commentators often state
that any given unprovenanced antiquity has a chance of being licit and because
it is impossible to tell either way they should be “innocent until proven guilty.”
Anti-market commentators often assert that because the market is tainted by
illicit objects, all unprovenanced antiquities should be treated as suspect. Either
way, the idea of the antiquities market as grey because of a mixing of looted and
unlooted antiquities assumes that such objects are truly indistinguishable. This
will not always, and perhaps not even often, be the case.
Antiquities that left their countries of origin either via legal export or before
relevant export restrictions were put in place might well have acquired docu-
mentation that proves their legitimacy. Since the seventeenth century,
antiquities in private collections have been extensively published, displayed,
declared on taxation and insurance forms, have appeared in wills, and have
been the subject of academic study. When an object that is truly from an old
European collection is offered for sale, this documentation is presented with
the piece and it is immediately distinguishable from the unprovenanced
antiquities surrounding it. An example of this is the sale at Christie’s London
of an ancient Egyptian statue depicting the scribe Sekhemka in 2014 by the
Northampton Museum (UK). The statue had been in the private collection of
the Marquess of Northampton who gifted the statue to the museum in 1870,
placing the object firmly out of Egypt before that date. The piece sold for £15.8
million. The sale was controversial as it represented the movement of a
publicly held antiquity into private hands and, ultimately, Northampton
Museum lost their accreditation from Arts Council England over it. The
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Simon Mackenzie and Donna Yates
response shows both how rare it is for a legitimate, legal antiquity to enter the
market and how obvious that legality can be to observers. It is not impossible
that there is a steady stream of undocumented but legal antiquities flowing
from the grandmothers’ attics of the world, but it does seem unlikely.
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What Is Grey about the “Grey Market”?
To say that the antiquities trade operates as a grey market is therefore to call
attention to a particular cocktail of its properties. Usually the term is used to
refer to the mixing of recently looted antiquities with those that can be sold
legally. Unlike in so-called black markets where purchasers will usually know-
ingly seek out and buy from criminals, the antiquities market is grey because
of the sale of illicit objects via a public, visible, and purportedly legitimate
network of dealers and auction houses. This interface is supported by the
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Simon Mackenzie and Donna Yates
ethical greyness applying to looted objects through the effects of the passage
of time and their passage through jurisdictions via multiple trades that
obscure or overwrite their illicit origins. It is also supported by the active
greying of the binary right/wrong distinction achieved by a neutralizing
discourse that permits the purchase of illicit objects in constructed circum-
stances of “saving” or “preserving” artifacts.
There are also, however, other inflections to the idea of this type of grey
market that we have not mentioned so far. We can, for example, observe a
public disapproval but private tolerance of the issue of looted antiquities in
the market among key sectors, such as the personal and institutional collect-
ing and dealing communities, and indeed some degree of ambivalence or lack
of interest among the general public. This we might call an elephantine type
of greyness: a large-scale ignoring of the “elephant in the room” (Zerubavel
2006). As well as grey elephants there are grey people in the market, referred to
above as Janus types. These are figures who have occupied peculiar positions
in the market over decades, being simultaneously both notable collectors and
dealers, supplying major institutions worldwide with high-end artifacts, and
also suspected, rumored, and by some parties known, to be criminal handlers
of stolen antiquities. In the grey areas these individuals occupy they have
traditionally performed brokering roles important to connecting the supply
and demand phases of the international trade. The apparent respectability of
the dealers in question insulates those at the demand end from direct know-
ledge of wrongdoing at source (Mackenzie and Davis 2014).
By way of conclusion, in greyness, which at first seems a somewhat straight-
forward and perhaps self-evident adjective to describe the global antiquities
market, closer analysis finds several layers of meaning which allude to the
multiple ways in which the interface between il/legal, il/legitimate, and in/
appropriate works to produce a marketplace that has so far successfully
resisted most of the ethical and legal scrutiny directed at it.
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5
Introduction
1
This research was supported by Grant SBE 1314631 from the US National Science
Foundation.
Odabaş, Holt, and Breiger
Lampke 2010; Holt et al. 2015), as well as on the social dynamics of exchange
and status in stolen data markets (Herley and Florencio 2010; Hutchings and
Holt 2015; Motoyama et al. 2011; Yip et al. 2013). Few studies have considered
or analyzed the governance structure of stolen data markets as a whole, how-
ever. What research has been done suggests that the illicit nature of stolen data
markets keeps them beyond the reach of state intervention, leaving internal
auto-regulation as the primary mode of governance (see Holt and Lampke 2010;
Holt et al. 2015). Sellers and buyers appear to move in and out of the market,
due in part to the public nature of advertisements. There are also various
administrative forces present, depending on the nature of the market, which
create a continuum of organizational sophistication ranging from no regulation
to heavy management of exchanges between participants by moderators and
site administrators (Dupont et al. 2016; Holt 2013).
These studies do not, however, account for the ways in which governance is
directly influenced by the underlying economic imperatives and social inter-
actions that affect the behaviors of buyers and sellers. If participants, whether
buyers or sellers, desire to make money from their involvement in a market,
then exchanges must be directly affected by the structure and conditions of
the market. In this respect, economic sociological theory may prove invalu-
able in improving our knowledge of stolen data markets. For instance, “mul-
tiple markets” approaches model the distribution of goods as a set of social
relations in which social networks (White 1981), cultural aspects (Reddy
1984), and economic factors interact (Zelizer 1988; Granovetter 1985).
Specifically, forums and IRC channels in which personal information is
bought and sold may comprise a two-sided market because they are operated
by independent groups that benefit from regulating transactions between
buyers and sellers who would otherwise have difficulty in efficiently complet-
ing transactions on their own. Industrial organization theorists focusing on
two-sided markets tend to consider the practices of market owners while
giving short shrift to the ways in which buyers and sellers operate to affect
markets’ economic structures, as this literature adopts a game-theoretic
rational-choice perspective. However, we argue that there may be greater
value in understanding the role of online communication in creating trust
and governing the market for stolen data as evident in the operation of web
forums. This leads us to emphasize both regulatory and normative pillars of an
institutional analysis of online stolen data markets. We focus on the regula-
tory strategies of market actors at the micro level to govern the market. At the
same time, we identify how these micro-level actions define what roles the
market owners, consumers, and sellers adopt and how this role structure
increases the level of market trust. If, as Beckert (2003) suggests, the economic
model of rational action focuses on how to conceive the structure of action,
while the sociological concept of embeddedness tells us about the external
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Governance in Online Stolen Data Markets
variables that influence the action process, then our analysis combines both
perspectives, thus reinforcing the link between them.
A two-sided market attracts two types of customer, notably sellers and buyers,
just as in an ordinary market. However, what makes this type of market
distinctive to economic theorists is its ownership and governance structure
and the way the volume of transactions can be increased by actions taken by a
third party, the owner (Caillaud and Jullien 2003; Evans 2003; Rochet and
Tirole 2003; Armstrong 2006; Armstrong and Wright 2007; Rysman 2009).
In legitimate credit card markets, for example, the third parties are credit card
companies, such as American Express, Visa, and MasterCard, which facilitate
economic transactions among retailers and their consumers when purchases
are made through credit. In the advertising sector, newspapers (or other
media) become the intermediary platform in which advertisements are visible
to their readers. As an additional example, shopping malls are owned by a
developer, an intermediary who aims to maximize profits by attracting many
consumers with an ideal shop-mix of retailers (Rochet and Tirole 2003).
In all these examples of two-sided markets, sellers want the platform to
attract as many buyers as possible because an increase in demand enables
them to increase the price of their product and the potential surplus emerging
from trade interactions. At the same time, buyers want to find as many sellers
as possible as they enter the platform, in order to find products at lower prices
and higher quality through product search (Nelson 1970; Stigler 1961). There-
fore, an increase in the number of buyers attracts more sellers; for example,
having more shoppers at a mall is a positive consideration in the location
decisions of more shops. Likewise, an increase in the number of sellers attracts
more buyers. This dynamic generates a duality that economists call “inter-
group externalities”: each potential seller (buyer) decides whether or not to
enter the community by taking into account the number of buyers (sellers)
already taking part in the market. The more buyers (sellers) are in the market,
the more the seller (buyer) is willing to enter.
This duality is typical of any market with information asymmetries. How-
ever, emphasizing this duality among sellers and buyers is important for
understanding the reason for a third actor to step in, which distinguishes
two-sided market governance from that of other market types. The main
reason for the market creator to also take on the role of regulator is the
potential for increasing the volume of transactions—and therefore market
efficiency—through specific measures to internalize the aforementioned
inter-group externalities. Those externalities can also be internalized by the
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Odabaş, Holt, and Breiger
participants in the market (the sellers and buyers), but those actors need to act
collectively in order to do so. When the contribution is voluntary, however, as
Olson (1965) pointed out, it is hard to sustain the participants’ collective
action for cooperation. The private actor can step in where collective action
among market participants either does not take place or remains limited.
The role of the platform (or market) owner is different in each market
because the form of externalities also differs. In legal credit card markets, credit
card companies take over the risks of consumer default that the seller firms
face. This leads more firms to step in, and to turn short-term credit used for
consumption purposes into a large-scale and global market. In the case of
shopping malls, the mall owner creates a physical attraction point for con-
sumers by adding extra facilities and services, such as on-site free parking, a
clean and orderly environment with security guards, and amusement areas for
children. Alternatively, these services could also have been provided if firms
could have joined collectively to build such a large facility, and in this way
they would not have needed to pay extra rent to the mall owner. However, it is
not easy to overcome free-riding problems, especially when the effort costs are
high. Therefore, the mall owner’s role becomes more crucial in urban areas as
commercial land is limited, and in suburban areas where potential shoppers
are distributed across a wide area.
Turning now to online stolen data markets, the role of the market owner as a
regulator in these markets appears to be the implementer of the tools to
increase the level of trust as buyers and sellers strive to maintain their ano-
nymity in an environment in which the quality of the goods is not observable
before purchase. We now discuss these issues.
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Governance in Online Stolen Data Markets
91
Odabaş, Holt, and Breiger
Once the data arrive, the buyer can then attempt to use them in order to
engage in fraudulent purchases, make transfers between accounts, or work with
other service providers in the market to obtain funds (Franklin et al. 2007; Holt
and Lampke 2010). Because buyers expect to turn a profit from their purchase,
they depend on working account information in order to maximize their
return. Should an individual not receive the data purchased, or if it consists of
inactive accounts or false information, or is of poor quality, the buyer has no
legal recourse to offset losses (Holt 2013; Holt and Lampke 2010).
As a result, market actors’ behavior is shaped by social forces intended to
maximize rewards for both buyer and seller while minimizing risk of loss (Holt
and Lampke 2010; Wehinger 2011). Unscrupulous sellers—known as “rip-
pers”—can post false ads to attract customers, accept payment for data, and
then provide bad data or not deliver any product (Herley and Florencio 2010;
Holt and Lampke 2010). To minimize the risk of being ripped off, some
markets allow buyers to post feedback and reviews of their experiences to
promote trust and establish seller reputations (Holt and Lampke 2010;
Motoyama et al. 2011). Such information directly affects actor position within
social networks, such that sellers with more positive reviews receive a higher
proportion of contacts from prospective buyers (Motoyama et al. 2011). Sellers
offer customer-service mechanisms designed to attract customers and main-
tain a client base over time, through the use of bulk discounts, samples, and
real-time customer support through various instant-messaging clients (Herley
and Florencio 2010; Holt and Lampke 2010).
Additionally, some sellers offer discounted pricing schemes based on the
quantity of data purchased, making it difficult to disaggregate the individual
price for each item (Franklin et al. 2007; Holt and Lampke 2010). Finally, the
negotiation process and purchase of data take place outside the forum or
public component of the IRC channel, making it extremely difficult to know
the quantity of data purchased or the final price paid for information (Franklin
et al. 2007; Herley and Florencio 2010; Holt and Lampke 2010; Motoyama
et al. 2011; Wehinger 2011).
Although most transactions are hidden from the public, there is evidence of
attempts to purchase data or engage in transactions through feedback and
reviews provided by data buyers in the forums. Customers are encouraged and
expected to publicly post their experiences with a seller in their forum com-
munication thread to characterize their encounters (Holt and Lampke 2010;
Motoyama et al. 2011; Wehinger 2011). If a customer does not feel satisfied,
either because the goods were not as advertised or went undelivered, the
experience can be described in clear terms for all to see. In much the same
way, those who were pleased with their interactions can post a comment
about the seller’s practices or data quality (Herley and Florencio 2010; Holt
2013; Holt and Lampke 2010; Motoyama et al. 2011). Thus, the use of
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Governance in Online Stolen Data Markets
As described in the preceding section, stolen data markets carry high risks as
selling stolen data is a criminal act; thus sellers and buyers remain anonym-
ous. These risks create market externalities, as described in the two-sided
markets literature. In stolen data markets, as in two-sided market theoriza-
tions, forum administrators step in as a third party to regulate the market and
to internalize the externalities.
Another crucial characteristic of stolen data markets, which is not addressed
at all in the existing literature on two-sided markets, is the personal and public
communication among buyers and sellers that helps them to measure the
risks of engaging in market interaction in a particular stolen data market.
Therefore, beyond arguing that the governance structure of stolen data mar-
kets can be identified as a two-sided market, we also indicate that two-sided
market theories ignore the interactions among buyers and sellers. This is due
mainly to the assumption that the market participants are incapable of intern-
alizing the market externalities by themselves, and therefore the entrance of a
private actor as a third party is necessary. However, as we observe in stolen
data markets, second- and third-party governance can act simultaneously in a
market. (Second parties are exchange partners themselves or relevant social
groups to which they belong; third parties are external enforcers who neither
participate in the exchanges themselves nor in the relevant networks;
Ferguson 2013: 46.) Therefore, we find it fruitful to adopt a multiple-markets
approach by looking not only at the interaction of economic factors but also at
the communication and social interaction among market actors.
As platform owners and operators, forum administrators play an import-
ant role in increasing the level of trust among anonymous participants in the
marketplace (Holt 2013; Holt et al. 2015). However, their role as market
regulator is affected not only by market conditions and group characteristics,
but also by the medium of communication. Traditionally in legitimate mar-
kets, platform owners serve as a regulator because there are externalities that
have not yet been internalized. Communication technologies among sellers
and buyers in illicit online markets enable these participants to take part as
market regulators also, independently of their direct communication with
the market owner. Therefore, we argue, these participants can also internal-
ize the externalities of low levels of market trust to some extent, and forum
administrators step in where communication among participants is insuffi-
cient for resolving problems. Thus, not only third- but also second-party
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Odabaş, Holt, and Breiger
controls (Della Porta and Vannucci 2005) are active in the self-regulation of
illegal online markets.
Despite the coordination problems and accompanying issues of market
trust, both the two-sidedness of stolen data markets and their online charac-
teristics are powerful features used in solving some of the valuation- and
competition-related problems frequently observed in illicit economies.
In illegal markets, advertising is difficult due to the market’s fragmented
structure. Also, non-transparency in illicit markets limits price competition;
it is difficult not only for buyers to compare prices, but also for sellers to find
customers (Beckert and Wehinger 2013). The “face-to-screen” setting of
online markets, however, not only brings what is “geographically distant
and invisible to its participants” (Knorr-Cetina and Bruegger 2002: 907), but
also enables buyers to easily screen the offers and information provided in the
market. Sellers post their ads, which include information on price and method
of payment, in web forums (or IRC channels), thus enabling buyers to search
prices easily among a number of offers. And the two-sidedness of the market
draws more potential buyers as market externalities are internalized.
The wealth of information available to prospective buyers in the market for
stolen data may not, however, create a more informed actor (for example, Holt
et al. 2015). The products offered by a seller cannot be examined in their
entirety in advance of a purchase. Buyers must make assumptions about the
structure of a data file or the amount of information available from a service
provider based on information provided by sellers in their advertisements,
which may often be false or misleading (Herley and Florencio 2010). As a
result, there is a substantial information asymmetry regarding the quality of
goods sold in data markets that is not easily overcome.
This issue is present across all manner of online markets, ranging from illicit
markets to eBay and Amazon sales (Conradt 2012; Dolan 2004; Heinonen
et al. 2012). Another drawback of online purchases is the sequential order of
transactions. Because sellers and buyers cannot meet in a physical space, the
buyer is expected to make the purchase first, and the seller is expected to
deliver the good afterwards. The buyer therefore faces a risk of fraud, as the
seller may not send the package after the buyer’s purchase (Conradt 2012;
Dolan 2004).
As a result, there is some similarity in the mechanisms to promote trust
between participants in stolen data markets and legitimate online markets. In
the next section we reformulate the economic perspective of research on two-
sided markets by emphasizing social structures that can be effective for creat-
ing efficiency (Baker 1984; Uzzi 1996), as marketplaces are not only composed
of exchanges but also dependent on governance and trust (Fligstein and
Dauter 2007).
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Governance in Online Stolen Data Markets
The transactional exchange of money for data and services in online stolen
data markets sounds simple and mimics traditional business models. A major
challenge is posed by the anonymity of online communication, however,
which minimizes the ability of participants to trust one another. Sellers can
decide to shirk their responsibility to the buyer and not send the information
purchased after receiving payment (Herley and Florencio 2010; Holt 2013;
Holt and Lampke 2010; Motoyama et al. 2011). Therefore, the platform is
confronted by the question of how to create internal trust-generating mech-
anisms that guarantee a secure system of exchange, and in turn how to attract
participants and enhance bilateral exchanges.
Buyers cannot truly assess the veracity of any seller’s claim until they
actually have the information or service available at their disposal (Herley
and Florencio 2010). The information in any advertisement can be “cheap
talk” (see Farrell and Rabin 1996), and may not affect the equilibrium result of
the exchange process. Or, the buyers may not make sure that the sellers’
products are of good quality before purchasing them, which creates another
credibility problem (Akerlof 1970; Jullien 2000).
Thus, there are two main problems to be solved in online stolen data
markets. First, it is hard for buyers to observe the level of quality of products
offered by sellers, creating a condition Akerlof (1970) calls the “market for
lemons” (Herley and Florencio 2010; Yip et al. 2013; Holt et al. 2013). Accord-
ing to this principle, if buyers in exchange markets cannot observe the quality
of products before purchasing them, they might not trust the sellers, and
therefore the market might not function. In a market in which there are two
types of good, high and low quality, in equal numbers, there is also no way for
the buyers to observe the quality before purchase; thus the buyers are willing
to pay only the average of the value of high- and low-quality products. High-
quality product sellers, in this case, are not willing to sell their product at a
lower price than its real market value, and therefore they leave the market
(Herley and Florencio 2010; Wehinger 2011). Only the low-quality products
that buyers are not willing to purchase are left in the market. As a result, the
market collapses due to this adverse selection problem.
The second problem is moral hazard: the seller has an incentive to shirk and
not complete the transaction after receiving the money from the buyer. (For
some economic applications of this concept see Arrow 1963, 1968; and Pauly
1968; also see Coyle 2007 for the specific areas in which the term is used.) Also,
the anonymity of participants exacerbates these two problems due to the
difficulty in tracing sellers who engage in malfeasance. Under these condi-
tions, it is hard to generate demand from the buyers’ side, leading forum
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Odabaş, Holt, and Breiger
96
Governance in Online Stolen Data Markets
Mediationa Authenticationa
through the participation of platform users (Holt 2013). People are rated either
by assigning reputation scores or through written reviews which provide
qualitative and detailed information about sellers (Holt 2013; Yip et al.
2013). Those written reviews enable the buyers to acquire a sense of the
trustworthiness of the sellers. The information usually involves comments
of buyers about the efficacy of the negotiation and delivery process, whether
the seller was available, and the speed of replies (Holt 2013; Holt and Lampke
2010). Such information directly affects actor position within social networks,
such that sellers with more positive reviews receive a higher proportion of
contacts from prospective buyers (Motoyama et al. 2011).
In a sense, using the same account or nickname enables the seller to build a
reputation in the market despite the fact that their identity is kept anonym-
ous. This mediator trust-generation process enables the evolution of reputa-
tion networks. Completing successful and trustworthy transactions increases
the seller’s reputation through positive feedback from the buyers, which in
turn increases the seller’s likelihood of being selected by other buyers
(Motoyama et al. 2011; Yip et al. 2013). If those transactions are again con-
sidered to be successful by the buyers, the seller gains in reputation.
The level of customer service advertised by sellers may be another signal of
trust and reliability. Some sellers regularly advertise dedicated customer sup-
port lines via a private messaging service (such as ICQ, pronounced “I seek
you”) and/or email to answer questions posed by buyers, facilitate purchases,
and demonstrate their willingness to satisfy customer needs (for example,
Franklin et al. 2007; Holt 2013; Holt and Lampke 2010; Hutchings and Holt
2015). Many marketplaces provide or require product-testing services,
whereby the forum moderators test a sample of products for quality assurance
(Holt 2013; Holt and Lampke 2010; Holt et al. 2015; Hutchings and Holt
2015). The tester posts a public review of the offered product or service to
validate any claims the seller has made. Some forums verify a seller’s reputa-
tion through this process, which buyers can observe as a signal of trust and
reliability (Holt and Lampke 2010; Holt et al. 2015). This practice fits within
97
Odabaş, Holt, and Breiger
98
Governance in Online Stolen Data Markets
They will then check whether the dumps (batches of credit card data that are
sold) are still active and can be used to make purchases. After the sample test,
the administrator reviews the seller and the quality of the sample and pub-
lishes this information on the reviewed user’s ratings (Franklin et al. 2007;
Holt et al. 2013; Holt 2013; Holt and Lampke 2010; Radianti 2010; Yip 2011).
Some moderators police the performance of actors within forums to ensure
that sellers’ and buyers’ activities do not upset the trustworthy environment
of the forum (Chu et al. 2010; Holt 2013). Those who do not follow the
predetermined rules of the forum may be detected by moderators or adminis-
trators who read posts and receive complaints from market actors. In turn, the
moderator may either send notifications to those users or directly ban them
from entering the web forum and block their accounts (Fallmann et al. 2010;
Holt 2013; Motoyama et al. 2011). These two mechanisms contribute to the
peacefulness of the platform as a social communication network, which in
turn benefits the web forum by attracting more active participants (see also
Chu et al. 2010).
The empirical study by Holt et al. (2013) underscores the impact of trust-
generating mechanisms on the price levels of products sold in different under-
ground markets. If higher prices can be interpreted as a signal of a higher level
of trust (that is, the participants’ willingness to pay higher prices in order to
incur lower levels of risk), then the positive association of trust-generating
factors can also can be interpreted as an indicator of successful trust gener-
ation in these underground markets. For instance, the researchers found that
prices were 44 percent lower in ripping forums (where fraudulent activities are
observed frequently) than in non-ripping forums (Holt et al. 2013). This
supports the argument that the perception of reduced prices may draw in
unsuspecting customers but increase their risk of loss.
While provision of escrow services results in a significant increase (by a
factor of almost two) in the level of prices for credit card dumps, product
testing has a similarly significant effect on the same dependent variable (Holt
et al. 2013). Positive feedback provision has a small (3 percent) though signifi-
cant negative impact on dump prices. This might be because the feedback is
interpreted as “cheap talk” in the market. However, more empirical study is
needed to obtain a clearer picture of how trust mechanisms are used, and how
effective they are in generating a more trustworthy market with a higher
volume of exchanges between sellers and buyers.
Discussion
Both the illicit and the online properties of online stolen data markets con-
tribute to making transactions risky. As these markets operate outside the
99
Odabaş, Holt, and Breiger
realm of state regulation, self-regulation becomes crucial for stolen data mar-
ket governance. Violence between actors is a common mechanism of self-
regulation in traditional illicit markets in the real world (for example, Jacobs
2000), although the situation is more complex when state institutions overlap
with illicit markets (for example, Dewey 2011; Reno 2009). With regard to
online spaces of illicit activity, their anonymized nature limits the ability of
actors to use offensive or retaliatory strikes to regulate market behavior.
Instead, the economic organization, communication technology used, and
socialization patterns of the actors identifies the type of problems to be
addressed in the online illicit market, which in turn shapes the form and
level of controls. In the case of stolen data markets, controls take the form of
trust-creating mechanisms, and they are implemented at both the second and
third levels. Second-party controls, such as ratings and customer services,
solve adverse selection problems in the market; and the entrance of a third
actor as not only a market creator but also a private regulator in the market
leads to the use of third-party controls, which can address moral hazard
problems which the second-party controls cannot.
We have emphasized the role of communication in increasing trust in mar-
kets, with an emphasis on the introduction of trust-creating mechanisms.
However, other ways in which communication plays a role in increasing or
reducing trust should be analyzed in greater detail. For instance, one of the
studies carried out to assess signaling in stolen data markets (Décary-Hétu and
Leppänen 2013) utilizes a single forum to assess “criminal opportunities,”
defined as the total number of threads in which individuals indicated they
were “looking,” “buying,” “selling,” and other action verbs related to the trade
of information. The authors find that performance is related to the length of
time a username had been registered with a forum, the percentage of posts that
were in “criminal” threads, and various measures of social ties between actors.
The situational characteristics of forums may also present signals of trust
concerning potential sellers. Evidence suggests that trustworthy sellers and
reliable products are offered in markets in which actors communicate with
one another in Russian (for example, Holt 2013; Symantec Corporation 2014).
There is also a relationship between the language used by market actors and
the advertised price of data (Holt et al. 2013). Actors in these markets may be
in Russian-speaking nations with difficult extradition relationships with the
United States and other European nations, thereby decreasing the risk of
detection and prosecution for offenders (Brenner 2011). The predominant
language used in forums may directly impact the ability of individuals to
participate, as those who are not fluent may be unable to communicate.
While some rippers may speak the same language as genuine sellers, learning
to communicate fluently in a foreign language is a difficult task for many, and
not easily mimicked. Individuals may be able to partially mimic foreign
100
Governance in Online Stolen Data Markets
Conclusion
101
Odabaş, Holt, and Breiger
102
Governance in Online Stolen Data Markets
though our effort here is at best a small step toward suggesting an alternative
approach to rational action models—which is what Beckert (2003), among
other analysts, expects scholars of economic sociology to provide—we hope to
have contributed insights from the study of hacker communities that can aid
in developing such an alternative.
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6
Introduction
1
I would like to thank Matías Dewey and Jens Beckert for their helpful comments on an earlier
draft of this chapter.
Futurity, Offshore, and the Political Economy of Crime
prosecutors and the courts to prove their cases; hence, criminal organizations
have a strong incentive to eliminate such evidence. The use of offshore
platforms is easily explained as well. The opacity provided by offshore juris-
dictions ensures anonymity and a degree of freedom from surveillance that is
not matched “onshore” (Palan 2003; Palan et al. 2010). I accept the above, but
I note that it does not explain why criminal organizations reinvest in legitim-
ate businesses.2 To that end, I would like to add a more nuanced understand-
ing of both the incentives and the means used by criminal organizations.
My argument in this chapter is theoretical. My approach is predicated on
the proposition that the capitalist economy consists of co-habiting econ-
omies. One of these may be described as the “economy of the present.” It is
an economy of exchange of goods and services that is described well (or not so
well, depending on one’s opinion) by standard economic models. This econ-
omy is dwarfed today by an “economy of the future,” or, as John R. Commons
described it, “futurity.” The economy of the future is an economy that trades
in anticipated future earnings; it generates credit and value today on the basis
of anticipated income streams.
However profitable, the organized criminal world operates largely in the
economy of the present, either by trading in banned substances (including
people) or the extraction of “value” out of current transactions. Organized
crime cannot participate, however, in the far more lucrative economy of futur-
ity. Organized crime business cannot trade, for instance, on its “goodwill”; it
faces great barriers to extracting value—in the form of shares, bonds, or even
loans—against future earning capacity and potential income streams. Organ-
ized crime is caught, therefore, in the slow lanes of the modern economy. But as
many criminal organizations are run by savvy businessmen, they seek to access
the economy of futurity by “laundering” not only money, but the very organ-
izations they operate. The ease of incorporation and the opacity provided by
offshore secrecy jurisdictions allow criminal organizations to appear to be
legitimate businesses and thus to access the realm of futurity.
2
Throughout this chapter I will use the term “business organization” in the same way as Diego
Gambetta. Gambetta argues that the Sicilian mafia is a “specific economic enterprise, an industry
which produces, promotes, and sells private protection” (Gambetta 1993: 1). The idea that criminal
organizations are businesses is well established in the literature. I will therefore discuss specifically
what are known as “organized crime” syndicates.
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Ronen Palan
1961; Commons 1959 [1924]; Veblen 1898). The old institutional economics
school stresses that every economic transaction takes place simultaneously in
two realms: an exchange of goods or services, or conversely, exchange of debt
and risk instruments (or financial instruments) takes place in one realm.
Correspondingly, all economic exchanges are replicated in a legal realm and
logged as property rights exchanges. Conventional economics is concerned
primarily with actors’ motives on the “real” side of the exchange and seeks to
develop accounts of the systemic effects of economic exchanges based on the
aggregation of individual motives and preferences in entering such contrac-
tual relationships. Old institutional economics, by contrast, pays great atten-
tion to the legal realm, believing that it shapes the dynamics of exchanges and
not the other way around.
Such double exchanges serve to highlight the economic difference between
legal and criminal economic activities. Property rights exchanges, or con-
tracts, are specified in terms of time and place and are backed by a sovereign
power. Sovereign power, therefore, is not only a political power but crucially
also an economic power. Sovereign power provides the necessary “coding” for
nearly all forms of economic exchange, defining the nature of the parties to a
contract, including their rights and duties, as well as the salience of the
contract itself. To achieve that, sovereign power encodes every single item or
transaction located within a territorial space with its own sovereign barcode:
individuals are defined as citizens, economic enterprises are licensed and
follow certain rules of incorporation; social clubs or religious groups are
licensed by the state and subject to rules of conduct. Every movable object,
cars, airplanes, ships, or boats, must be licensed by states and display a flag or a
license plate. In many countries pets and agricultural animals are numerated
as well and given some sort of a passport, and so on. In this way the territorial
space is populated by legally defined entities and items.
The system of coding is onerous, expansive, and fraught with ethical and
normative questions of liberty and freedom. Why does it work? Sovereign
power may be thought of in transaction cost terms: by providing a standardized
system of coding and rules of exchange, the sovereign reduces transaction costs
because most transactions are standardized. The state maintains an implicit
contractual relationship with its citizens, whereby a certain degree of liberty is
exchanged for economic welfare (North 1994). From this perspective the state
can be seen as a “club good” in Buchanan’s perspective (Buchanan 1965). The
services of transaction cost reduction are explicitly withdrawn from criminal
activity. “When a market is defined as illegal,” write Beckert and Wehinger, “the
state declines the protection of property rights, does not define and enforce
standards for product quality, and can prosecute the actors within it” (Beckert
and Wehinger 2013: 6). Because all economic exchanges are exchanges in
property rights, transactions must be backed by some dimension of sovereign
110
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Ronen Palan
closely from the perspective of the dominant realm of legal transfer of prop-
erty rights, a slightly different picture emerges. The legal realm of property
transfer reveals a surprising divergence in the behavioral orientations of indi-
viduals and corporate entities towards wealth already accumulated and wealth
to be accumulated (Palan and Mangraviti 2016). Consistent with its past
orientation, standard economics is concerned, as John R. Commons argued,
primarily with wealth-already-accumulated, while business, in contrast, is
interested primarily in wealth-to-be-accumulated: the ownership, control,
and leverage of future wealth. There are important distributional battles over
wealth-already-accumulated, concerning the ownership of discrete assets, but
wealth-to-be-accumulated is generated through organizations. As a result,
investable assets are, strictly speaking, organizations or “going concerns”
(Atkinson 2009). People invest, therefore, in organizations and not in
assets. Only organizations are able to generate wealth that as yet is still to be
accumulated.
Let us take an historical example that marked the development of an
economy of the future. An illustration of the economic significance of intan-
gibles can be inferred from the way the US Steel Trust was organized by
J.P. Morgan and Co., and one of the largest and least liked railway barons,
James Hill, largely to prevent the ruinous competition that Andrew Carnegie
was about to launch with his competitors in Pittsburgh (for an additional
discussion see Palan 2012, 2015).
The area around Pittsburgh was at the epicenter of the steel sector during the
late nineteenth century, contributing about 80 to 85 percent to US steel
production. Andrew Carnegie, a successful steel magnate, in 1899 announced
his intention to build a larger plant with the latest improvements on the shore
of Lake Erie. J.P. Morgan and Co. was called upon by some of Carnegie’s
competitors to establish, in response, a holding company that would take
over all the plants and form an integrated large company to avoid this “ruin-
ous competition” from Carnegie.
It was imperative that the new trust would buy all of Carnegie’s interests in
the region. The value of Carnegie’s holdings on a traditional valuation of
reconstruction costs was estimated at $75 million at the time. Carnegie,
however, demanded and received $300 million in gold bonds as his share
value in the new trust. Carnegie’s explanation for the not inconsiderable
difference of $225 million, recalls Ida Tarbell, was that “[b]usiness on a grand
scale required special talent for organization and management, and that talent
was rare . . . If the right men were obtained, they soon created capital; otherwise
capital soon took wings” (Tarbell 1904: 9). This “talent” was described
in business lingo as “goodwill.” The difference in valuation, writes John Com-
mons, could not have been ascribed “on the traditional theory of economics, as
the value of the corporeal property. Nor was it incorporeal property since it
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Futurity, Offshore, and the Political Economy of Crime
was not a debt owed to Carnegie. The only other name that could be given to it
was ‘intangible property’, the name given by the financial magnates them-
selves” (Commons 1961: 649–50). Carnegie charged, in effect, $225 million
for his personal goodwill (Tarbell 1904).
But what exactly was the goodwill that Carnegie brought to the enterprise,
considering that he henceforth withdrew from steel making? The value of his
goodwill was the potential or anticipated future earnings that were to accrue
to the new enterprise on the basis that Carnegie was removed from competi-
tion. Carnegie was not alone in obtaining “goodwill” money during the
creation of the US Steel Trust. The establishment of US Steel was such an
audacious act that overnight $700 million of “corporeal” property held by
the different steel barons who made up US Steel became $1,600 million
(Albion and Williamson 1944). Or to put it in different terms, the new
company was capitalized at an equivalent of one fourth of US GNP at the
time. J.P. Morgan and Co.’s commission alone was $150 million, or nearly 2
percent of US GNP. This amounted to a huge injection of capital into the
economy. So much so that Carnegie refused to accept shares in the new trust,
which he considered “water,” and demanded gold bonds. The creation of so
much new capital under the banner of “goodwill,” in and by itself, sparked the
1903 financial crisis (Jospehson 1962). But despite its stock being “water,” US
steel survived and flourished.
Today according to some estimates, the goodwill value of the Standard &
Poor’s 500 amounts to about 80 percent of their value. The consulting firm,
Ocean Tomo, estimates that for the year 2009 the relevant value for the EU
was 70 percent, 35.8 percent for Japan, and 73.5 percent for China (Ocean
Tomo 2009). Wealth in modern economies is largely a denomination, there-
fore, of goodwill.
The story of the establishment of the US Steel Trust is the story of the magic
of the legitimate market. Considering that businesses seek to capture future
wealth (wealth yet to be accumulated), businesses will be prepared to pay for
those future income streams today, if at a certain discount. In effect, investors
are betting on those organizations they believe will generate future income
streams. But current investments in future income streams create a value at
the present time. The organization is valued above its current assets, or
replacement value, and as a result the whole is more than the sum of its
parts (Palan 2012). This additional value is described by Commons as “futur-
ity” and it is entered in the books under the category of “intangible property”
or “goodwill.”
Criminal organizations cannot directly access the economy of futurity. Such
organizations are not formally constituted; they have no formal share owner-
ship structure supported by the sovereign, and their business interests are not
protected by the state in such a way that future income streams are secured.
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Ronen Palan
Criminal organizations may be able to generate great profits today, but they
are not able to leverage their profits against the future. They are stuck, there-
fore, in the slow lane of the economy. That is where the offshore economy
comes into play.
114
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115
Ronen Palan
transaction is structured in such a way that the maturity point of the transac-
tion that triggers taxation is deferred to some point in the future, but the
future never truly materializes, and/or the transaction is structured in such a
way that it takes place in a simulated realm that is not easily recognizable by
the tax authorities and hence the transaction may disappear completely from
their radar. That is where derivatives come into play (Palan et al. 2016).
The archipelago of jurisdictions that offer such facilities can be organized
into three conglomerations. One conglomeration has coalesced around what
I described in a series of publications as the “Second British Empire.” It is
centered on the City of London, British-dependent territories such as Jersey
and Guernsey, British overseas territories such as the Cayman Islands and
Bermuda, and former British colonies, such as Hong Kong and Singapore.
This conglomeration accounts for roughly 40 percent of wholesale inter-
national financial transactions. The second is a European conglomeration
that consists of the Benelux countries, Switzerland, and Ireland, and accounts
for about 15 percent of international financial transactions. A third one, now
emerging, is an Indian Ocean conglomeration that consists of the Persian Gulf
states, Mauritius, and the Seychelles. It is estimated that there are in excess of
$25 or even $30 trillion of financial assets registered in such locations.
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Futurity, Offshore, and the Political Economy of Crime
These four offshore sites alone accounted for 85 percent of the cases involving
transactions of illegal income (Maingot 1995).
In late 2005, Callum McCarthy, head of the UK’s Financial Services Author-
ity, publicly declared that he had information showing that organized crime
groups had infiltrated some of London’s best-known financial institutions.
They did so to learn logistics and mechanisms and techniques to avoid
detection.
Tax havens are also associated with money laundering. The International
Monetary Fund estimates the magnitude of money laundering worldwide at
3–5 percent of the world’s GDP (INCSR 2008: 5), a figure larger than the US federal
budget. Not all money laundering operates through tax havens. Tax havens are,
in fact, a minority of the countries that appear on the list of jurisdictions defined
by INCSR as “major money laundering countries” (2008: 58).
Rawlings and Unger (2005) argue that some tax havens specifically target
criminal money as a developmental strategy. In 1995, the Seychelles govern-
ment passed the Economic Development Act (EDA), which created a board
that could give specified concessions and incentives to foreign investors. “One
of these incentives was complete immunity from prosecution in criminal
proceedings and the protection of assets from forfeiture even if investments
were earned as a result of crimes committed outside the Seychelles” (Rawlings
and Unger 2005: 5). To obtain this immunity an individual had to invest a
minimum of $10 million in the Seychelles. The EDA was strongly condemned
and the provision was repealed in 2000, but by then the funds were already in
the Seychelles.
Pacific Island tax havens are strongly associated with money-laundering
schemes. Nauru, a small Pacific atoll, was involved in the largest money-
laundering case in history, the so-called Russiagate scandal of the late 1990s,
which involved the Bank of New York. Victor Melnikov, deputy chair of the
Russian Central Bank, stated that $70 billion had been transferred to Nauru
from Russia in 1998, compared with total Russian exports of $74 billion. This
is a figure remarkably close to the amount of International Monetary Fund
credit advanced to Russia in July 1998 in response to the financial crisis that
engulfed the country that year.
Palan et al. (2016) show that the key destinations for Russian “investment”
abroad are Cyprus, the Netherlands, the British Virgin Islands, and Luxem-
burg. But while tax avoidance is a common drive for offshore schemes around
the world, in Russia, intricate chains of offshore entities are constructed with
the aim of hiding the ultimate ownership of assets. In Russian offshore “enve-
lopes” Cyprus has historically been a popular node of initial incorporation of
the offshore entity, which in turn would have financial and legal links to other
financial havens in order to be able to tap into the onshore financial systems
of Europe and North America.
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Ronen Palan
Offshore subsidiaries of the world’s premier banks are also heavily impli-
cated in embezzlement and money laundering. Oxfam estimates that from
1993 to 1998, during the reign of Nigeria’s dictator Sani Abacha, about $5
billion disappeared from state coffers, of which $2.5 billion was embezzled
by the dictator and his family alone (Hodess 2004: 5). The Swiss Federal
Banking Commission released the names of the banks involved in manage-
ment of the money embezzled by the former Nigerian dictator in September
2000. The list contains the names of some of the best-known international
banks, such as Credit Suisse, Crédit Agricole Indosuez, BNP, and Baring
Brothers.
Tax havens undoubtedly facilitate tax evasion, tax avoidance, money laun-
dering, and corruption, but no one is able to estimate the sums involved with
any degree of accuracy. Consequently, no one is able to address the corruption
that underpins this market.
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Part III
The State in Informal Market Places
7
Matías Dewey
Introduction
micro-finance organizations that has been stressed, but also that of informal
institutions, including the “hawala” system in Arab countries (Qorchi et al.
2003) and “pasanaku,” an ancient Andean group-based method for raising
money and financing individual needs.
The main goal of this chapter is to dissect the role of one of these
mechanisms—state-sponsored protection rackets—in the context of illegal
markets. As shall be noted, protection can be a “service” provided by extra-
legal organizations such as the mafia, or illegally by the state itself. Whereas in
the first case protection acts as a shield against the harmful actions of some
anonymous person, in the latter case (illegal) protection works as a shield
against the law itself. As I argue in the next section, the latter does not exclude
violent actions stimulated by servants of the state and, since it is carried out by
official authorities, necessarily implies the non-enforcement of the law or a de
facto suspension of it. The suspension of the enforcement of the law is sold as a
particular illegal service and thus opens up a space of social relationships
regulated by extra-legal principles.1
I provide evidence that such state-sponsored protection rackets are present
on a massive scale at La Salada, an illegal and informal marketplace occupying
eighteen hectares of a suburban area close to the city of Buenos Aires. This is a
single-product marketplace in which all of the 7,822 stalls sell clothing that is
for the most part counterfeit and produced in nearby sweatshops.2 La Salada is
a major supply center for these goods, the first link in the supply chain of the
entire Argentine market. Smaller, satellite garment marketplaces in other
provinces are stocked by buyers traveling to Buenos Aires and purchasing
directly from producers, who rent a stall at La Salada in order to sell items
manufactured in the sweatshops they run in the local area. As the heart of the
country’s illegal garment market, La Salada is where market, government, and
state actors meet. The protection rackets in operation there thus affect the
workings of the whole market.
The state-sponsored protection rackets at La Salada serve as an interface
between the interests of garment producers and those of government: the
latter indirectly imposes the payment of an informal regular fee, seeking to
1
I am indebted to Renate Mayntz who helped me to specify the difference between mafia and
state-sponsored protection rackets. Although at first sight state-sponsored protection rackets
appear as a protection against the “law”—that is, not against potential violent retaliation—a
closer look shows that law-enforcement agencies that provide this kind of illegal service are
highly corrupt institutions and therefore have close links to criminals. This way, buyers of
protection rackets pay first of all to evade capture by the law, but also, secondly, to avoid violent
actions that law-enforcement agencies outsource to criminals.
2
The author counted the stalls with the help of a manual counter in July 2013. The estimated
margin of error is approximately 100 stalls and variations on this number, depending on whether
new streets have been acquired by the market and filled with additional stalls.
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State-Sponsored Protection Rackets
finance local political and police activities, while the former pay a fee in order
to produce garments under officially banned conditions.
Focusing on the governmental use of the selective enforcement of the law,
the present chapter seeks to make a contribution on informal mechanisms
fostering unlawful exchanges. In seeing structures of protection rackets
such as that at La Salada as a set of unwritten, shared rules that are “created,
communicated, and enforced outside officially sanctioned channels” (Helmke
and Levitsky 2006), the chapter also offers novel insights into the analysis of
economically relevant informal arrangements. Examining how authorities
maintain them helps us to explain a political economy configuration, the
most visible outcome of which is a remarkable proliferation of sweatshops
and low-cost garment consumption.
This chapter is structured as follows. First, I briefly review the literature on
protection rackets and analyze them from a theoretical perspective. Second,
I address the political economy configuration that led to the emergence of the
illegal garment market centered on La Salada and the structure of state-
sponsored protection rackets in place there. After referring in the third section
to the methods used during the fieldwork, I then present the empirical evi-
dence that state-sponsored protection rackets exist at La Salada and regulate
its economic activities. Lastly, the conclusion outlines the relevance of
this argument for future research on the interface between state and informal
or illegal markets, and its particular importance for markets of officially
banned goods.
Over the years, sociology has established solid knowledge of the main business
of mafia groups: the production, promotion, and sale of private protection
(Gambetta 1993: 1. See also: Chu 2000; Volkov 2002; Varese 2004; Campana
2011). Informed by the idea of “sale of protection,” scholars have observed
similar patterns between state agencies and criminal groups, such as the state-
sponsored “protective umbrellas” of gambling houses and prostitution rings
in China (Gong 2002; Shieh 2005; Zhang and Chin 2008; Wang 2012, 2014)
and the mafia, or “roofs,” in Russia (Galeotti 1998; Volkov 2002; Stephenson
2016). In the Americas, constellations of protection rackets have mainly been
observed as a problem of state capacity or willingness to enforce the law. Early
studies on the gambling business in Chicago (Haller 1971; Reuter 1984) and
on prostitution, gambling, and betting elsewhere (Gardiner 1970) have also
underlined the role played by the legitimacy of certain banned products; that
is, the “popular desire to consume such illegal services as gambling and
prostitution” (Gardiner 1967: 124). In Mexico, institutions of protection
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Matías Dewey
126
State-Sponsored Protection Rackets
Because state servants, notably police forces, have the power to manipulate
the enforcement of the law, they are able to suspend its application and to
transform it into a commodity that is sold to those who need “protection”
from it. Needless to say, enforcing the law rightfully remains a possibility; this
constant threat means that social relationships between state agents and
illegal market actors can only be asymmetrical. State actors are empowered
by the possibility to enforce or suspend the law in one way or another, which
affords them a certain degree of control over illegal market actors and
transactions.3
Although some parallels may be drawn, the sale of protection should not be
seen as a sale of inaction, a misunderstanding probably derived from the
common phrase “to turn a blind eye.” Situations of course exist in which
inaction and protection do appear to be the same phenomenon: for instance,
if a police officer charges a law-breaking motorist a certain amount of money
in exchange for not applying the official fine, then protection from the law is
offered through inaction. However, other constellations suggest that the sale
of protection is a phenomenon in its own right. Examples of this can be seen
when police officers refrain from taking action in order to create a specific
demand for protection. A shopkeeper, for instance, might refuse to pay “add-
itional contributions” for protection; in retaliation, they would suffer police
inaction, fall victim to crime, and thus be indirectly compelled to require the
previously rejected protection. Here, inaction generates a demand for protec-
tion. Put another way, protection is commonly carried out through action; it
does not entail “doing nothing.” Protection is, therefore, the product of
organization. While the goal of state-sponsored protection rackets is to func-
tion as mechanisms for the extraction of economic resources, they also allow
the control of illegal actors and exchanges.
Methods
The case study presented here is the result of seven months of ethnographic
immersion in La Salada marketplace. I forged many relationships during my
time in the market: with residents of the area, informal workers in the market,
and lenders at a micro-credit institution. Through snowball sampling, I came
3
In this regard, scholars usually ask if this is a case of extortion and not of protection. In my
view, we can apply Federico Varese’s (Varese 2014: 350) explanation for the case of the mafia. State
agents do indeed force the extraction of resources for services that are promised and delivered. Even
when they might overcharge for a service and supply one of poor quality, it does not follow that the
provided protection is bogus. In fact, as I will show, if the illegal market grows and outlaws freely
participate in the market, it means that protection is being delivered.
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Matías Dewey
to spend a great deal of time with a Bolivian family, owners of a market stall at
La Salada and responsible for its day-to-day operation.
In total, I conducted 109 in-depth interviews with actors at La Salada (where
permission was given, the interview was recorded. Otherwise, it was written
up afterwards). Armed with these data, I was able to uncover and analyze the
protection-racket structure that underlies the market and molds the expect-
ations, behaviors, fears, and economic calculations of its participants. The
existence and workings of the protection-racket structure was verified with
the help of two types of data. Firstly, to establish the overall size of the
marketplace I counted the number of stalls, including both those located
inside the site’s several warehouse-like buildings (shed markets) and the
open-air stalls lining the surrounding streets. Secondly, I questioned actors
from different sectors of the marketplace in order to ascertain the reach of
the informal taxation system and elicit information regarding the amount
and frequency of the fees paid. After cross-referencing the data with the
statements of the interview subjects, it was discovered that stallholders in
the shed markets and the street markets were paying fees of differing
amounts. This was attributed to the existence of different “fee zones,”
which help to soften the blow of a period of low sales and intensify the
positive impact of busy sales periods. The zones were shown to be crucial
in helping stallholders decide where to rent a stall. As well as workers within
the market, I also reached out to actors with high-ranking positions in
government: a former principal commandant of the Argentine National
Gendarmerie, two local politicians working for the local government, four
shed-market managers (three current, one former), an informal fee collector,
and the former advisor to a previous secretary of commerce. These interviews
served to establish links between government agencies and La Salada’s struc-
ture of protection rackets.
Ethnographic fieldwork stands at the center of my study of La Salada
marketplace. As other scholars have already established, it is through this
method alone that power structures can be properly studied and “clandestine
connections” most accurately reconstructed (Auyero and Joseph 2007: 5;
Kubik 2009: 31). Patterns of conduct and repeat references made by market
actors can, through the standard ethnographic research practice described by
Katz (2001, 2002) and Becker (1958), be assigned evidentiary value. Further
standard procedures used to trace and confirm links were cross-checking and
member checking. It is through these methods that the state-sponsored pro-
tection rackets and their central role in market life came to light and that
beneficiaries of the collected fees could be confirmed. The latter—namely, ten
state agencies at various levels of government—were explicitly named by
three different interview subjects (a fee collector, an ex-manager, and a local
politician) with no links to one another.
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State-Sponsored Protection Rackets
The demise of the textile industries and rising unemployment in the immi-
grant population during the 1990s had a direct impact on the area that now
4
Interviews with sweatshop producers and workers.
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Matías Dewey
130
State-Sponsored Protection Rackets
Stocky, tough Rodrigo is a busy man, and it is not easy to get an interview with
him. Because his father bought one of the former leisure centers that became
the shed markets, Rodrigo has been able to watch La Salada’s growth from a
privileged position. What was once a recreational area for families to relax in
saltwater swimming pools and thermal springs underwent a dramatic trans-
formation when the economy faltered in the 1980s and 1990s. When visitor
numbers plummeted and maintenance of the pools became impossible,
Rodrigo reacted by reinventing the property as a well-known discotheque, and
reinventing himself as a successful manager of a group of cumbia singers,
known as cumbieros. His entrepreneurial streak continued in the 1990s with
a further diversification into the garment market, which proved to be lucra-
tive. By filling in the pools with rubble and other debris, Rodrigo was able to
convert the space into market stalls that he, along with the managers of the
other two big shed markets, still rents out to stallholders selling garments.
From the late 1990s onwards, Rodrigo’s business turned into one of real estate.
Despite the difficulties, I managed to meet with Rodrigo, sitting with him
for three hours in the office he has had decorated with cumbieros posters and
where every available surface is covered with piles of merchandise. “I will
show you the people who visited us [at the disco]: Ricardo Darin, Susana
Gimenez, all famous people, good times,” he says, calling to his assistant to
fetch a photo album. The album is filled with the expected images of TV stars
posing for the camera, but there is far more to the story than smiling celebri-
ties. He points to his former business partner, saying: “He was a cop [taquero],”
before turning the page to point out some more figures, explaining that “he
was a cop, we were friends, he was a doctor in the Buenos Aires police, and he
was actually the manager of all the doctors [capo medico]. He helped me. And
the guy on the left, he was also a policeman.” The photo album became a
symbol of what Rodrigo went on to say in our meeting: “Nobody tells me the
true story. Who would? The police come and surround you . . . They come to
pick it [the money collected to pay the protection rackets] up . . . Well, you [as
manager] have to deal with all these things.” The police behavior described by
Rodrigo is common knowledge in La Salada. Officers wait at the entrances
to La Salada, stopping garment producers and seizing their stock, which is
the produce of sweatshop labor and often counterfeited. This impacts the
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Matías Dewey
5
The total number of stalls in La Salada is 7,822 and those that exhibit counterfeited products
number 3,017. The amount of the “fee” varies according to various factors. For example, the price
goes up if the stalls are well located or if the managers have improved the facilities.
132
State-Sponsored Protection Rackets
A dual “dirty togetherness” of market managers and police officers out for
themselves cannot quite account for the huge structure of protection rackets
at La Salada because it fails to acknowledge the political connection. Protec-
tion rackets are frequently connected to politics (for example, see Haller 1990
for the case of Chicago) and La Salada is no exception, revealing links between
the managers, police forces, and sub-national politicians.
These links became patently clear to me during an interview with one of the
shed-market managers, known as “Tony.” It had been difficult to schedule a
meeting with Tony, and fixing the appointment to meet him on his own had
been a major achievement. However, when I entered his office, I was met with
what I thought was a disappointing scene: Tony was immersed in a discussion
with four other people. But then he introduced his friends: a former chief of
the national gendarmerie and his son, who also happens to be Tony’s lawyer;
Tony’s right-hand man, who accompanied the president of Argentina on a
state visit to the Republic of Angola in early 2012; and the advisor to a former
state secretary of commerce.
Charlie, the former chief of the national gendarmerie, met with me not long
after my interview with Tony and revealed the relative transparency with
which the protection rackets operate on buses bound for and leaving La
Salada. He leaned in across the table in the café where we were talking and
practically whispered his explanation: “But it isn’t in anyone’s interest [to
prevent buses from getting to La Salada]! Look, it isn’t convenient for any
authority that buses don’t come any more . . . because they regularly leave a
racket. If the business is over, we are fucked.” He began to imitate a senior
police officer speaking with a junior officer who has stopped a bus: “I take you
and tell you, ‘Stupid! . . . What are you doing? I told you, stop the buses from
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Matías Dewey
time to time: of 20 [buses] you stop one. If you take 100 pesos from each
passenger . . . with 50 passengers . . . you do the math!’ ” Finally, Tony did not
hesitate to mention his own skills as a rackets taker: “Do you think that if I see
a bus on the highway I don’t know it’s coming from La Salada? They even
have the money ready! The passengers themselves say, ‘Guys, we should put
the money there.’ ”
Brothers Pablo and José Luis Arequipa currently run a fully equipped work-
shop in the same Buenos Aires neighborhood as La Salada. The brothers’
parents emigrated from La Paz, Bolivia, to Buenos Aires sometime between
2003 and 2006. They are not sure exactly when, only that it was between the
births of Pablo and José Luis; the elder was born in Bolivia, the younger in
Argentina. Their workshop, a sweatshop according to the definition in the
literature, produces around 100 counterfeit Nike jackets per week to be sold at
one of La Salada’s stalls.
One morning, says my detailed field note, we were at the stall when José
Luis, looking through the jackets hanging from the roof, identified the marca
collector. “Here comes the marca guy [el de marca],” he told me and then
started looking for money in the belt around his waist. Seconds later, the
collector appeared. Well-presented, clean-shaven, and with a notebook in
his hand, he greeted each of us in turn: first José Luis, then Pablo, and finally
me, the unknown. The collector smiled slightly, as if trying to ease the
situation. It wasn’t necessary; José Luis already had the fee ready that was
the motivation for the collector’s visit, and once the money had changed
hands there was no need for his continued presence. The collector moved on
to the next stall. The whole scene was dominated by a vacuum that Pablo tried
to fill with jokes and greetings. As the money was handed over, the only words
exchanged were a shy “thanks” followed by a hasty “bye.” There were neither
questions about why marca had to be paid, nor a warning regarding the
offence [José Luis and Pablo selling fake “Nike” jackets]. Nothing. Everyone
was simply hoping that the situation would come to an end as quickly
as possible. Nobody speaks because both parties have something to hide.
Collectors are characterized by their highly groomed presence. In an eclectic
commercial atmosphere, with exhausted buyers carrying bags and boxes, and
sellers drained from several hours on their feet, collectors stand out a mile,
dressed as if they were on their way to some glamorous party. They try to be
attentive and pleasant. It is them and not the stallholders that try to create and
maintain the pretense of a casual, relaxed situation. The only reason that
brought them here was to collect the racket, a fee that they are able to impose
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State-Sponsored Protection Rackets
only because the stallholders are ignorant and distrustful. No one seems to
know what kind of offence the violation of a trademark is or what the penal-
ties for it are. Nor is there solidarity among stallholders to be able to resist what
the collectors ask for and do.
The uncomfortable atmosphere that accompanied the collector is soon
broken by Pablo and José Luis’s chatter as they justify their own behavior
and complain about the collectors. Their reaction is something of a charade:
the money that changed hands actualizes a long-standing relationship that
exists between the stallholder and the collector-policeman. I talk to the broth-
ers’ mother, Susi, about this relationship: “[They] collect a lot of money from
us, from robbers, from everyone,” she admits, but is also quick to point out the
benefits of paying marca. “[A branded garment] is what you sell best, because if
you sell plain [liso, without brand logos] you can’t shift anything [no se mueve
nada],” she explains. Though Susi is aware of the risks of selling counterfeit
goods, she is able to justify doing so on economic grounds: “Marca makes you
sell more, and that is convenient in every respect.” Because it is intentionally
oriented toward meeting her desire for economic gains, Susi’s actions, along
with those of thousands of other sellers, recreate the structure of protection
rackets every day.
It is not just the Arequipas who profit from this business; nor is the success
of the enterprise confined to Buenos Aires. Buyers from all over Argentina
travel to La Salada to take advantage of the low-price garments and wholesale
character of the market. These two factors are the principal causes behind the
522 “Saladitas” (very small La Salada-like resellers) that have sprung up in 111
towns and cities throughout the country, as condemned in 2014 by the
Argentine Confederation of Medium Enterprises (Confederación Argentina
de la Mediana Empresa) (CAME 2014). It should be noted that there is more
than money at stake: for Susi and her family, La Salada is defined in terms of “a
kind of home from home.” Goldstein observed the same phenomenon in
Cochabamba, Bolivia (Goldstein 2016: 200).
In considering everyday routines, the effects of the protection-racket
structure can be clearly seen. When the structure prevents the law from
being enforced, it gives actors room for action and, over time, it allows the
sedimentation of routines, giving a strict timetable of which days are used
for cutting fabric and which days are for sewing, which days are for ironing
and which are rest days. “The fair [la feria],” says Pablo, “is Monday and
Wednesday; this means that for [having the jackets ready on] Monday we
only have Thursday, Friday and Saturday. We are slaves because we also have
to sell tomorrow, Sunday. We have only two days for resting. Tuesday? Forget
it [olvidate]; we don’t do anything.” He smiles at this, adding: “Tuesday we are
folding, ironing, and picking up stuff from other sewers.” The sentiment is
repeated during other interviews with other stallholders managing the same
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Matías Dewey
busy routines: the coordination of suppliers of thread, fabric, and plastic bags
with the workers sewing the garments and taxi companies is no easy task. All
the exchanges are made without the support of contracts or other written
regulations and thus require, at the very least, a phone call to confirm. Perhaps
most important in these exchanges are the involvement of, as Susi’s husband
Carlos puts it, “people in whom we can trust.” The state, as the provider of this
shield, controls the conditions surrounding the emergence of a social eco-
nomic order in which formal legal principles are extremely weak. In levying
marca from stallholders, the state has established an asymmetrical relation-
ship in which those at the bottom of the social structure are firmly kept
there. This asymmetry is all too obvious to La Salada’s workers, especially
those who, in April 2015, witnessed the bulldozing of market stalls at the
state’s command.
Conclusion
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State-Sponsored Protection Rackets
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8
Kirsten W. Endres
Introduction
Lào Cai City, November 2010. After spending the whole morning and most of
the afternoon at the Lào Cai central market, the main field site of the research
underlying this chapter,1 my assistant and I went for a stroll along the newly
built riverfront promenade. Stretching from Lào Cai’s historical center
towards the Kim Thành trade and industrial zone, still under construction,
the walkway had become a popular recreational space for walkers and joggers.
On the other side of the Red River, which, together with the confluent Nậm
Thi River, demarcates the border with China, an ever growing number of high-
rise buildings dominate the cityscape of Hekou (Yunnan Province). For a
while, we watched as a wooden long-tail boat carried three men and one
woman over to the Chinese riverbank. Then a small group of wild-looking
young men caught our attention. “Wanna go to China?” one of them asked in
heavily accented Vietnamese. We decided that feigning naive curiosity was
probably the best strategy to get some information about what seemed to be
an unlicensed ferry service across the river. An official-looking Vietnamese
man wearing a shirt with attached badges appeared and offered assistance.
I asked him, “So the boats can go freely? We wouldn’t get caught?” “Don’t
worry,” the man answered reassuringly, “we have a guarantee on that (có bảo
1
The research was carried out from October 2010 to March 2011, with follow-ups in August and
September 2012, April 2013, and December 2014. All individuals mentioned in the text have been
given pseudonyms to protect their privacy and anonymity.
Kirsten W. Endres
lãnh).” “How much for the passage?” my assistant prodded further. “50,000
đồng2 one way,” the man said. “In fact only worthwhile if you have lots of
goods to carry, or if you don’t have a visa for China and just want to cross over
to take a few photos,” he explained. “But if you’re here for longer, I’d recom-
mend you to get a border crossing permit, it’s easy to obtain and in the end it’s
cheaper than the ferry service.”
The Lào Cai–Hekou border region is a vivid—although in no way unique—
example of what Itty Abraham and Willem van Schendel (2005: 29) describe
as a “zone where illegal flows are naturalized and intersect with the licit.”
Their terminology needs some clarification. Whereas in common usage the
binary opposition of the legal and the illegal is treated as synonymous with
that of the licit and the illicit, Abraham and van Schendel argue for “a more
subtle approach” that distinguishes “between what states consider to be
legitimate (‘legal’) and what people involved in transnational networks
consider to be legitimate (‘licit’)” (2005: 4). In other words, certain practices
or things that the state prohibits by law may be seen by ordinary citizens as in
perfect accordance with prevailing social or moral norms. The contradictions
between official (state) definitions of legality and the people’s sense of legit-
imacy perhaps become most visible at the territorial margins of nation states
(Galemba 2013: 276; see also the discussion in the Introduction to the present
volume). As adjacent border towns, Lào Cai and Hekou are quite distinctive
in character and appearance, but both can be described as places where
“unsavory trades of smuggling and trafficking, gangs and prostitution prosper
alongside the grandiose development paradigm[s] promoted by the state”
(Zhang 2014: 377). In Vietnam, these paradigms have been translated into
development strategies aimed at creating a “rich people, strong country, fair
and civilized society” through modernization, industrialization, and urban-
ization (DiGregorio et al. 2003: 171). Following in the footsteps of China,
Vietnam’s economic reforms were launched in 1986 (known as Đổi mới) and
marked the country’s shift from centrally planned state socialism to market
socialism. However, as Martin Gainsborough (2010: 482) and others have
pointed out, these policies did not necessarily entail a retreat of the state.
Instead—and this is particularly true for Vietnam’s border regions and their
trade—the reform era has seen the emergence of both “new forms of state
regulation and gate-keeping” (Gainsborough 2010) and a range of creative
ways to circumvent them (Endres 2014a: 615).
Building on Edward Aspinall and Gerry van Klinken’s (2011: 11) conceptu-
alization of “the state” as a complex relational arena “that favours certain
kinds of strategic action while obstructing others, and where multiple players
2
In 2010, the exchange rate was around VND 24,000 to the euro.
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Shoddy, Fake, or Harmful
compete for influence, make alliances, and expropriate resources,” this chap-
ter shows that illegality in Vietnamese marketplaces is deeply entrenched in
forms and practices of state illegality, the most common and widespread of
which is corruption by government officials.3 The vantage point of my ethno-
graphic inquiry is the Lào Cai central market located in the city’s historic
center on the right bank of the Red River. According to Jens Beckert and Frank
Wehinger (2013: 3), “[m]arkets are illegal if the product itself or the exchange
of it violates legal stipulations.” As I will illustrate, three of the four forms of
illegality identified by Beckert and Wehinger (4–5) are neatly in place in the
Lào Cai central market: (1) illegality due to the outlawing of specific products;
(2) illegality due to product forgery; and (3) illegality due to the violation of
regulatory stipulations. But can the Lào Cai central market therefore be under-
stood as an illegal market? In strictly legalistic terms the answer might be
positive. From an anthropological viewpoint, however, the issue demands a
more differentiated approach that takes into account “what people actually do
and say about what they do (or do not do) and say (or do not say)” (Smart and
Zerilli 2014: 226).
This chapter draws attention to some of the numerous entanglements
between the legal, the illegal, and the informal4 that characterize local cross-
border trade and marketplace-based commerce at the Vietnam–China border.
I approach this issue from the perspective of Kinh (ethnic majority) small-
scale traders in the border city of Lào Cai, whose overall participation in
Vietnam’s market-oriented economy is increasingly being marginalized by
recent government policies geared towards modernization, industrialization,
and urbanization.5 The unevenness with which these policies and their
related regulations have been implemented and enforced at various levels of
(local) authority has contributed to the emergence of what Aihwa Ong has
termed “zones of exception” (Ong 2006: 118). Ong originally applied the
concept of the exception to neoliberal strategies of governing that rely on
3
The term “market” is not necessarily limited to a particular gathering place devoted to trading
activities, but refers in a general sense to the broader institutions and mechanisms that facilitate
the exchange of commodities between buyers and sellers. In contrast, the term “marketplace”
traditionally denotes a spatially bounded location where buyers and sellers engage in commercial
and social exchanges. However, as Kalman Applbaum (2005: 285) argues, “the oppositional
categories of empirical vs. abstract market . . . exist in reality on a continuum with each other and
they are, in fact and in theory, converging.” Marketplaces are thus productive sites for considering
how these two aspects of market—the empirical and the abstract—relate to one another.
4
The term “informal economy” was originally popularized by Keith Hart (1973) to describe the
“unregulated” economic activities of low-income urban dwellers in Ghana. Here, it refers to
“situations where the goods and services transacted are legal, but the ways in which they are
transacted are not” (Smart and Zerilli 2014: 229).
5
In Hanoi, for example, many old-style, “traditional” markets have been demolished and
replaced by upscale shopping malls or office buildings (Endres 2014b). In places throughout
Vietnam, modernization and urbanization projects have also led to an increasing
marginalization of farmers and workers (for example, Harms 2013; Labbé 2014).
143
Kirsten W. Endres
At first glance, the Lào Cai central market appeared to be a typical state-run
covered market, like many others in the country. The only obvious difference
was the much larger volume and variety of Chinese-produced merchandize for
sale at the more than 700 stalls distributed over two separate buildings.6 The
two-story main building, where I conducted the bulk of my six-month
6
The main building was demolished in October 2014 and has since been replaced by a more
contemporary structure.
144
Shoddy, Fake, or Harmful
Smuggling takes place on a small but relatively complex scale. The smugglers take
advantage of the fact that border residents are exempt from import duties, as
stipulated in Prime Minister’s Decision No. 254/2006/QĐ-TTg of November 7,
7
Vietnam is a multi-ethnic country with fifty-four officially recognized ethnic groups, of which
the Kinh (or Việt) form the majority. Although ethnic minority groups account for the majority of
the population in Vietnam’s northern uplands, including Lào Cai province, Lào Cai City (as well as
most district towns) is now overwhelmingly dominated by Kinh lowlanders (for a detailed study of
Hmong ethnic minority trade relations see Turner et al. 2015).
145
Kirsten W. Endres
8
Decision No. 254/2006/QĐ-TTg of November 7, 2006, amended by Decision No. 139/2009/QĐ-
TTg of December 23, 2009. The government is currently considering cutting this amount to a total
of 8 million đồng per month (see TBKTSG 2015).
9
Since January 2014, these cargo bicycles are no longer allowed at the border gate.
146
Shoddy, Fake, or Harmful
Figure 8.1. Vietnamese goods transporters at the Lào Cai–Hekou border gate
regulations and preventing the entry of illegal goods and counterfeits. Again,
the size of the bribe depends on the type and volume of goods. Mr. Hưng, for
example, who supplies stall holders at Lào Cai market with Chinese-produced
household items, has an arrangement with the market control team on a
400,000 đồng per month basis. The good-natured trader intermediary regards
these arrangements as necessary for him and the vendors he supplies to run a
reasonably profitable business. “ ‘Making law’ with customs officials and evad-
ing (import) tariffs are essential, otherwise we couldn’t make enough to live
on,” he claimed. Mr. Hưng sees his trade in cheap home appliances as a
legitimate way to make a humble living, not as a way of getting rich. “Honest
people who run legitimate businesses stay poor; they just make enough for a
bowl of rice,” he explained. “If you want to become rich, you have to smuggle
and trade in prohibited goods.”
While this may well be the case for organized smuggling rings who are, for
example, involved in the illegal timber and wildlife trade (To et al. 2014;
Milliken and Shaw 2012), it is not necessarily true for small-scale traders and
transporters who trade in contraband goods and prohibited items. Let me turn
briefly to the story of a woman smuggler named Thanh who supplied Lào Cai
market vendors with a variety of so-called “hot” goods (hàng nóng). These
goods exemplify Beckert and Wehinger’s (2013) category of “illegality due to
147
Kirsten W. Endres
An Illegal Market?
Whenever I met Mrs. Thanh at the market, I was mesmerized by the swiftness
and agility with which she wove her way through the maze of stalls, goods,
and people. Most of the stalls lining the entrance hall specialized in selling
10
On my visit to Lào Cai in December 2014, however, the ferry boat service seemed to have
stopped working. This may not be a permanent condition, though, because such types of illegal
activity tend to disappear and reappear frequently.
148
Shoddy, Fake, or Harmful
11
Market stallholders were generally reluctant to state their monthly income. On average, their
profits seemed to range from 6 to 17 million đồng per month, depending on the type of goods and
seasonal conditions. In comparison, wages in Vietnam have averaged 3.6 million đồng in the past
seven years, reaching an all-time high of 4.8 million đồng in 2015 (approximately 195 euros; see
<http://www.tradingeconomics.com/vietnam/wages>).
149
Kirsten W. Endres
the relevant authorities. Although there was no guarantee that “making law”
would produce the intended results, the bribes often worked to the traders’
advantage. Mrs. Mai, for example, was caught selling sex toys to a group of
male tourists. Her stall was closed down, but three days later she was back
to business. “I had to prepare an envelope for the [market management]
director,” she explained. “If not, they would have closed my stall for a
whole week.”
Another category of goods that violates current trade law are counterfeits or
so-called mimic goods (hàng nhái), ranging from fake designer handbags to
bootlegged DVDs and pirated software. Most of the forged products are manu-
factured in China.12 Mobile phones are one example. Hardly distinguishable
from authentic branded phones from the outside, fakes are available at many
stalls in the entrance hall and openly displayed in glass cabinets. One of the
mobile phone vendors, Mr. Duy, shared his opinion as follows: “I do not like
selling Chinese phones because the quality is not guaranteed. The phones are
credited with many functions but many of these functions (photographing,
filming) actually don’t work as advertised.” According to Mr. Duy’s own
classification, there are three types of clients who go for the counterfeits.
The first type are “childish people” (người ấu trĩ ), that is people who like
cheap goods and have no understanding of quality. The second type com-
prises rich people who like unusual things (đồ lạ) in the latest fashion, but who
would only use them for a short time before throwing them away. The third
type of people in Mr. Duy’s classification scheme are members of ethnic
minority groups who do not have much money but who like to “ape” (học
đòi) prestigious consumer tastes. “I don’t advise the buyers much,” Mr. Duy
said, “if they want to buy a good product I refer them to the more expensive
Vietnamese-produced mobile phones, if they like something cheap they just
pounce on the Chinese ones.” In order to compensate for the lack of a
company warranty, most mobile phone vendors provided their own return
guarantee by affixing a small label to the fake phone when the deal had been
sealed. Alternatively, as observed by two journalists, the vendor may allay the
client’s concern by stating “Rest assured. The goods here have a great reputa-
tion, what do you need papers for; in case of damage just bring it back;
remembering my face is the warranty” (Hà An and Nguyễn Tuấn 2014).
Like the counterfeit mobile phones, many China-made products sold at Lào
Cai market were described by the vendors as shoddy goods (hàng đểu) that do
not stand the test of time. In fact, most of the Chinese home appliances
available in the market’s electronic section were of low quality (kém chất
12
Fake products have long been swamping the Vietnamese market. In 1999, shoppers in Ho Chi
Minh City even spoke of a “a national epidemic of false goods and consumer deception” (Vann
2006: 287).
150
Shoddy, Fake, or Harmful
lượng), unclear origin (không rõ nguồn gốc), and without proper warranty
stamps (không có tem bảo hành)—all of which is in violation of regulatory
stipulations, such as the Vietnamese Law on the Quality of Products and
Goods (Quốc Hội 2007). Despite these shortcomings, such goods are in popu-
lar demand because they feature attractive designs and are much cheaper
than, for example, Vietnamese-produced goods. As one vendor put it,
Customers like buying cheap goods, sometimes just for the sake of buying, and
when the item no longer works they just throw it away. Many people know the
goods are of low quality, but they still buy them because they’re so very cheap.
Wherever there is supply, there is demand; where there are customers, there are
also sellers.
(Informal conversation, January 17, 2011)
151
Kirsten W. Endres
smuggle or do bad things, it is only enough for food and basics” (interview,
February 8, 2011).
The avenues through which Vietnamese small-scale traders in Lào Cai City—
be they goods transporters at the border gate or stallholders in the central
market—have seized the economic opportunities at the Vietnam–China bor-
der are invariably smoothed by “greasing the palms” of local government
officials. Transporters and intermediaries offer bribes in order to pass legal
goods through customs without having to pay the regular taxes or duties or in
order to smuggle illegal goods of all sorts across the border and onwards to the
market. Stallholders who sell illegal goods in the market bribe the authorities
in order to be able to go about their business unmolested. No matter whether
the goods are legal (but have been transacted through illegal channels), illegal
(but socially licit, such as various kinds of counterfeit and sub-standard prod-
ucts), or both illegal and illicit (for example, weapons), illegality in small-scale
cross-border trade is commonly seen as a legitimate way of earning a living.
Most traders feel that state policies and legal restrictions (including taxes,
tariffs, trademark rights, quality standards, and so on) constrain their partici-
pation in the economy and regard their bribe arrangements as essential for a
profitable business. Their claims on the state to their right of earning a
livelihood become apparent through the rhetoric of exchange that traders
use to frame their bribe arrangements with officials. As Mr. Hưng put it, “They
[the officials] give us a bowl of rice, and we reciprocate with a bowl of congee
[người ta cho mình bát cơm, mình bớt lại bát cháo cho người ta]” (Endres 2014a:
618). But this does not mean that the law is negotiated solely in the traders’
interest. In Vietnam’s state administration system, public offices are distrib-
uted through webs of clientelist relationships that need to be nurtured by the
exchange of gifts and favors. Customs officials, market control inspectors, and
police officers, among others, may all have made large financial investments
in securing their positions, which they now seek to recoup by extracting bribes
from below, part of which needs to be channeled upward again in exchange
for further patronage. In other words, what we have here is a situation where
“the state” thrives upon the proliferation of informal and illegal activities,
irrespective of the loss of revenue from import duties (see Reeves 2014: 169).
In common with Ong’s spaces of neoliberal exception—that is, economic
enclaves and special administrative zones that are “subjected to different
kinds of governmentality and that vary in terms of the mix of disciplinary
and civilizing regimes” (Ong 1999: 7)—the Vietnam–China border region
offers avenues for economic self-advancement to small-trader and migrant
152
Shoddy, Fake, or Harmful
citizens. The difference is that these avenues are not officially sanctioned by
the law. On the contrary, they are, in fact, restricted in scale and scope by the
existing legal framework. The traders circumvent these restrictions by negoti-
ating bribe arrangements with government officials, without which, they say,
their businesses would not yield enough income to feed their families. How-
ever, these arrangements, irrespective of whether the merchandise is strictly
prohibited by law or merely liable to customs duty, ultimately traps the traders
within a “grey space” of uncertainty that lingers between the “light” of free
trade, economic opportunity, and self-advancement, and the “darkness” of
illegality, corruption, and arbitrary exercise of power.13
References
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ness.” In Illicit Flows and Criminal Things, edited by Willem van Schendel and Itty
Abraham, pp. 1–37. Bloomington: Indiana University Press.
Agamben, Giorgio. 1998. Homo Sacer: Sovereign Power and Bare Life. Stanford, CA:
Stanford University Press.
Applbaum, Kalman. 2005. “Directions in the Anthropology of Markets.” In Handbook of
Economic Anthropology, edited by James Carrier, pp. 275–89. London: Edward Elgar.
Aspinall, Edward, and Gerry van Klinken (eds). 2011. The State and Illegality in Indonesia.
Leiden: KITLV Press.
Báo Lào Cai 1996. “Khánh thành hai chợ Bắc Hà và Cốc Lếu đưa vào sử dụ ng
[Inauguration and Turn-Over of Bắc Hà Market and Cốc Lếu Market].” Báo Lào Cai,
December 5, 267: p. 5.
Beckert, Jens, and Frank Wehinger. 2013. “In the Shadow: Illegal Markets and
Economic Sociology.” Socio-Economic Review 11(1): pp. 5–30.
Chan, Yuk Wah. 2013. Vietnamese–Chinese Relationships at the Borderlands: Trade, Tour-
ism and Cultural Politics. New York: Routledge.
DiGregorio, Michael, A. Terry Rambo, and Masayuki Yanagisawa. 2003. “Clean, Green,
and Beautiful: Environment and Development under the Renovation Economy.” In
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Donnan, Hastings, and Thomas M. Wilson. 1999. Borders: Frontiers of Identity, Nation
and State. New York: Bloomsbury Publishing.
Endres, Kirsten W. 2014a. “Making Law: Small-Scale Trade and Corrupt Exceptions at
the Vietnam–China Border.” American Anthropologist 116(3): pp. 611–25.
13
I adapted this graduation from Oren Yiftachel’s concept of “gray space” developed in critical
urban theory that “refers to developments, enclaves, populations and transactions positioned
between the [‘light’] of legality/approval/safety and the ‘darkness’ of eviction/destruction/death”
(Yiftachel 2009: 243).
153
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154
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of December 31, 2010, Summarizing the Work of the Market Control Department for
the Year 2010, Directions and Tasks for 2011). Unpublished report.
TBKTSG 2015. “Vietnam Vows to Restrict Cross-Border Trade.” VietnamNet Online,
February 6. <http://english.vietnamnet.vn/fms/business/122662/vietnam-vows-to-
restrict-cross-border-trade.html>.
To, Phuc Xuan, Sango Mahanty, and Wolfram Dressler. 2014. “Social Networks of
Corruption in the Vietnamese and Lao Cross-Border Timber Trade.” Anthropological
Forum 24(2): pp. 154–74.
Turner, Sarah, Christine Bonnin, and Jean Michaud. 2015. Frontier Livelihoods: Hmong
in the Sino-Vietnamese Borderlands. Seattle: University of Washington Press.
Vann, Elisabeth F. 2006. “The Limits of Authenticity in Vietnamese Consumer Mar-
kets.” American Anthropologist 108(2): pp. 286–96.
Williams, Allan M., and Vladimir Baláž. 2002. “International Petty Trading: Changing
Practices in Trans-Carpathian Ukraine.” International Journal of Urban and Regional
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Womack, Brantley. 2006. China and Vietnam: The Politics of Asymmetry. Cambridge:
Cambridge University Press.
Yiftachel, Oren. 2009. “Critical Theory and ‘Gray Space’. Mobilization of the Colon-
ized.” City 13(2): pp. 240–56.
Zhang, Juan. 2014. “Remote Proximity.” HAU: Journal of Ethnographic Theory 4(1):
pp. 361–81.
155
Part IV
Shifting Definitions of Illegality
9
Introduction
1
Hemp, a non-psychoactive variety of the cannabis plant, had been used as a textile throughout
the early history of the United States.
Cyrus Dioun
in the early twentieth century (Bonnie and Whitebread 1970). Cannabis was
prohibited at the state and federal level in 1937 and removed from The
Pharmacopeia of the United States in 1942.2
These campaigns not only successfully changed the legality, medical
status, and name of cannabis (i.e. marijuana), but also transformed public
perception of the flowering herb.3 In the decades following prohibition,
both prohibitionists and marijuana users primarily conceptualized marijuana
as a recreational intoxicant used for hedonistic pleasure. This recreational
intoxicant conception, still prevalent today, described the act of using mari-
juana as “getting high” or “getting stoned” and portrayed marijuana users as
“potheads” with a “hang-loose ethic” in opposition to the laws and norms of
mainstream society (Suchman 1968). Prohibitionists classified marijuana as a
dangerous drug and associated marijuana users with criminal behavior and
a lack of motivation (Becker 1963; Drug Free World Foundation 2013).
Marijuana consumers described the herb as an intoxicant that was a safe and
pleasurable alternative to alcohol (McAdory 2013). While opponents and
proponents of marijuana use held diametrically opposing views, stigmatizing
or valorizing marijuana’s intoxicating properties, both groups viewed it pri-
marily as an intoxicant, not a medicine, following marijuana’s prohibition.
In 1970 the US government codified the recreational conception of mari-
juana when it enacted the Controlled Substances Act (CSA), which classified
marijuana, along with heroin, LSD, MDMA, and a number of other psyche-
delics, opioids, and amphetamines, as Schedule 1 narcotics with “no currently
accepted medical value” and “high potential for abuse” (21 USC } 812). This
classification prohibited the medical use of marijuana and obstructed research
into its medical applications. While the US government had prohibited mari-
juana use for decades, the CSA marked the beginning of the “war on drugs,” in
which federal, state, and local governments escalated the arrest and prosecu-
tion of producers and consumers of marijuana and other illegal drugs. In the
following decades, the number of marijuana arrests in the United States
increased from 59 arrests per 100,000 of the population in 1969 to 276 arrests
per 100,000 of the population in 2010 (US Department of Justice 1965–2010).
Economists estimate that federal, state, and local authorities spent approxi-
mately $13.4 billion in 2010 enforcing marijuana prohibition (Miron 2010).
Marijuana prohibition remained relatively unchallenged until the AIDS epi-
demic created a deadly crisis that pushed patients and their loved ones into the
illegal market to search for ways to combat the effects of the disease. During the
2
Proponents of cannabis prohibition were also active in the temperance movement to prohibit
alcohol and the movement to ban opioids.
3
As “marijuana” was the common term used to describe cannabis following prohibition, I will
use it when describing developments and events that took place after marijuana use was federally
prohibited in 1937.
160
Making the Medical Marijuana Market
height of the epidemic, many AIDS patients experienced cachexia (wasting syn-
drome), a complication of AIDS that diminished appetite and the ability to absorb
nutrients, leading to rapid weight loss and increasing the likelihood of death. Some
AIDS patients, searching for ways to cope with the disease, found that marijuana’s
antiemetic properties—popularly known as “the munchies”—increased appetite,
helping patients retain weight and live longer (Grinspoon et al. 1995).
Marijuana’s ability to alleviate some of the suffering caused by the AIDS
epidemic created an opening for social movement activists and illegal marijuana
sellers to construct a new conception of marijuana as a compassionate palliative
for the seriously ill and dying. This discursive opportunity did not lead to the
displacement of the recreational intoxicant conception of marijuana, but rather
provided a platform for entrepreneurs and activists to append it, carving out (or
layering on) an understanding of marijuana as a medical palliative for the sick
and dying, even though the state did not recognize its medical use.
Marijuana’s ongoing prohibition obstructed the development of formal
market institutions, leading market pioneers in San Francisco, who were
located at the intersection of the marijuana market and the city’s gay com-
munity, to build an interface between the illegal market and the legitimate
needs of dying patients. These strategic and value-rational actors constructed
the foundations of what would become a multi-billion dollar medical mari-
juana industry by openly defying the law and constructing informal institu-
tions, such as organizational forms (the marijuana buyers’ club) and rules of
exchange (proof of medical need), that were sanctioned by society, while
remaining formally prohibited by the state.
Market pioneers helped legitimize and legalize these informal institutions by
developing frames and targeting political opportunities at the local and state level
where they could bypass lawmakers and win support for medical use through the
ballot initiative, a form of citizen legislation in which the public votes on a
referendum to approve or reject a law. These efforts were successful: San Francisco
voters passed a ballot initiative authorizing the medical use of marijuana in 1991
and California voters followed soon after to make it the first state to authorize
medical marijuana use in 1996. By June 2016, twenty-five states and the District of
Columbia had enacted laws allowing the medical use of marijuana, giving rise to a
$4.5 billion industry that was simultaneously state-authorized and federally pro-
hibited (ArcView Market Research and New Frontier 2016).
Theoretical Development
161
Cyrus Dioun
4
In contrast, actors in legal markets may openly advertise and sell their wares to any qualified
customer without fear of state prosecution.
162
Making the Medical Marijuana Market
5
As Sarah Quinn (2008) notes in her study of the secondary market for the life insurance market,
if “institutions act like lenses that filter, focus, and direct different cultural strands and direct and
refract otherwise diffuse cultural logics,” then market activists use strategic frames to “extend and
transform these institutionalized logics” (797).
163
Cyrus Dioun
The AIDS epidemic rocked the United States during the 1980s and early 1990s,
with over 500,000 reported cases and 300,000 deaths between 1980 and 1995
(amfAR 2016). AIDS was initially described as “gay cancer” due to the disease’s
predominance in the gay community. San Francisco, a self-proclaimed “gay
mecca,” was the epicenter of the crisis with nearly twice as many cases per
capita as New York City, the city with the second-highest incidence rate
(Kolata 1994). The widespread death and decimation that characterized the
epidemic devastated the city of San Francisco, creating sympathy for AIDS
patients and political and cultural opportunities for medical marijuana market
pioneers. Clint Werner, an activist and writer, describes the Castro district, the
historical heart of the San Francisco gay community, during the epidemic:
I landed here in San Francisco as a Deadhead, but I’m also a gay man, and it was 1986,
which was really the beginning of the height of the peak of the AIDS epidemic . . . If
you weren’t there you can’t begin to imagine what it was like in the Castro in 1986. It
was a horror movie. It was like the show the Walking Dead [a television program
164
Making the Medical Marijuana Market
Respondent Description
about zombies] . . . the look of the people, young people . . . just emaciated, gaunt,
purple, their skin discolored, their faces had welts and lesions . . . and just death,
death everywhere—death—and suffering and misery and despair.
(Interview April 23, 2012)
The deadly nature of the crisis spurred individuals to take illegal, formerly
unthinkable actions. Legal sanctions paled in comparison with the wave of
death that was surging through the community. Reflecting on the rise of
medical marijuana in San Francisco, Dennis Peron, an illegal marijuana dealer
and gay rights activist who is widely credited as the founder of one of the first
medical marijuana buyers’ clubs in San Francisco, describes how the crisis
compelled patients and activists to break the law and pioneer a new market:
“It had to happen here. It had to happen to persons affected by the
AIDS epidemic. It had to be someone who had nothing to lose” (interview
May 18, 2012).
During this period, AIDS patients found that using marijuana helped miti-
gate the rapid weight loss associated with wasting syndrome, a complication
of the illness that made it hard for patients to maintain weight. Werner
describes nursing his close friend who was affected by wasting syndrome,
So I took him in and nursed him and took care of him . . . I would make really
nutritious stews like one-pot meals . . . and then I’d get him high. I’d give him three
or four bong hits and he would be like ‘Arrg arrg.’ He would scarf all this food
down . . . I mean there are drugs out there like compazine that will suppress your
nausea, but they don’t give you the munchies, they don’t make you really want to
eat, you still have to sort of force yourself to eat because you have the suppression
of the nausea. But cannabis is unique because it triggers that compulsion to
165
Cyrus Dioun
“ehhh” [makes gesture like shoveling food in mouth] . . . and so he would eat and
people would eat and not waste away as quickly.
(Interview April 23, 2012)
By 1993 over 28,000 San Francisco residents were living with AIDS, represent-
ing approximately 4 percent of the city’s population (Kolata 1994). Moreover,
many AIDS patients were politically active and socially embedded in a commu-
nity integrated by decades of organizing and activism, creating local solidarity
with and sympathy for patients (Armstrong 2002). Wayne Justman, an early
volunteer at Peron’s first medical marijuana club, describes local awareness of
and support for AIDS patients: “San Francisco was receptive to this [medical
marijuana], but then again who the hell didn’t see somebody that they didn’t
know in church or in their community, a friend, who had not acquired AIDS or
was HIV positive” (interview April 30, 2012). Werner echoes this sentiment:
“jurors are drawn from the voter rolls, and there’s no way they could seat a jury
who was going to convict a man who was selling marijuana to AIDS and cancer
patients” (interview April 23, 2012).
In contrast, the federal government actively obstructed the use of medical
marijuana by AIDS patients. Prior to the start of the AIDS epidemic, the federal
government was forced by the courts to create a small medical marijuana
program in response to a lawsuit by Robert Randall, a glaucoma patient who
used marijuana to relieve eye pressure. Randall sued the government in 1976
and settled, leading to the creation of the Compassionate Investigational New
Drug (IND) program, which provided government-grown marijuana to ser-
iously ill patients.6 When AIDS patients discovered that marijuana helped
alleviate some of the complications of the disease in the late 1980s and early
1990s, Randall created the Marijuana AIDS Research Service, an organization
to help AIDS patients navigate the process of applying to the IND program
(Randall 1991; Randall and O’Leary 1998). Soon afterwards, the number of
applications by AIDS patients to the IND program surged, leading the federal
government to stop accepting new applicants in 1991. Dr. James Mason, the
United States Assistant Secretary for Health, gave the following explanation
for the program’s demise: “If it’s perceived that the Public Health Service is
going around giving marijuana to folks, there would be a perception that
this stuff can’t be so bad. It gives a bad signal . . . there’s not a shred of evidence
that smoking marijuana assists a person with AIDS” (Isikoff 1991: A14;
Werner 2001).
6
The IND program, supervised by the Food and Drug Administration, was a federal program that
would grow marijuana and send pre-rolled marijuana cigarettes (joints) every month to
approximately fifteen patients suffering from serious illnesses such as multiple sclerosis and
glaucoma.
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Making the Medical Marijuana Market
Thus, the AIDS crisis did not lead to the displacement of old institutions
prohibiting marijuana for medical use. It initially did just the opposite, lead-
ing the federal government to reify its prohibitory stance and shut down the
IND program that could have legally provided marijuana to AIDS patients.7
Unable to gain access to marijuana through state-authorized channels, AIDS
patients were pushed to the illegal market, where medical marijuana activists
and pioneers developed informal institutions to distribute marijuana for med-
ical use, creating an interface between the illegal market for marijuana and the
legitimate needs of AIDS patients.
In 1991, Dennis Peron started one of the first openly operating medical mari-
juana “buyers’ clubs” in the United States, dispensing marijuana to AIDS
patients in San Francisco. Peron had sold recreational marijuana in the illegal
market for decades, most notably maintaining a speakeasy-type shop over a
restaurant in San Francisco’s Castro district during the 1970s. Peron had long
been an activist promoting the legalization of marijuana for recreational
use and had sponsored a pro-marijuana ballot initiative with legendary San
Francisco supervisor and gay rights activist Harvey Milk in 1978. Peron pursued
medical marijuana legalization after his partner died of AIDS in 1990. Peron
explains: “So when my lover died . . . I set upon a path . . . for people like him.
He had suffered so much and marijuana helped him so much. It was my
personal eulogy for him. And it was for the world, but it was to him” (interview
May 18, 2012).
The creation of a medical marijuana market for AIDS patients required an
interface between the illegal market for marijuana and the law-abiding AIDS
patients who did not have the illicit connections to purchase it. Prior to selling
medical marijuana, Peron sold recreational marijuana through interpersonal
networks. To avoid the consequences of taking part in an illegal act, Peron
would only sell marijuana to a new customer in the illegal market if an
existing customer vouched for them. Once Peron started providing marijuana
to AIDS patients, he had to create informal market institutions in order to sell
to patients whom he did not know through his interpersonal networks. Peron
describes this shift from networks to informal institutions:
I sold black market pot, you know, if I knew you and you had been referred, it
would be alright, I would sell to you. But I remember the first time I sold to
7
As of January 2016, federal prohibition of marijuana remains in place, and the Food and Drug
Administration still maintains that marijuana has “no accepted medical use.”
167
Cyrus Dioun
someone I didn’t know at all. He had a little piece of paper that said, “I have AIDS.”
I signed him up and think [to myself], “I’m setting on a path I had never been on
before, selling to strangers at the house.” I had never done that before. I did it fully
expecting to get busted.
(Interview May 18, 2012)
Peron moved from the safer system of personal networks, where he would sell
marijuana to a customer if they were a friend-of-a-friend, to a riskier informal
institution, where a person’s claim to illness, in this case AIDS, granted them
the right to purchase marijuana without an interpersonal connection. While
the state continued to prohibit and prosecute the exchange of medical mari-
juana, effectively obstructing formal market institutions, Peron and other
market pioneers created an informal system in which patients gained access
to the market, not based on who they knew (networks) or the support of the
law (formal institutions), but through a moral claim to purchase marijuana
based on physical infirmity.
Medical marijuana markets that were prohibited by the state, but socially
legitimate, gave way to a “work-around” system, in which doctors would write a
“recommendation” rather than a Food and Drug Administration-required pre-
scription in order to bypass the law. This system would lay the groundwork for a
quasi-legal recommendation program that became the basis for patient access
in state-legal marijuana markets.8 Peron’s pioneering efforts created not only an
informal set of rules guiding exchange but also a new organizational form, the
medical marijuana buyers’ club, to distribute marijuana to AIDS patients.
Peron’s first retail store, the San Francisco Cannabis Buyers’ Club, borrowed
from two contemporaneous organizational forms: illegal clubs for buying
experimental antiretrovirals in San Francisco and New York and marijuana
coffee shops in Amsterdam.
In the late 1980s and early 1990s, AIDS patients, doctors, and nurses organ-
ized “buyers’ clubs,” where club members illegally imported experimental
antiretroviral drugs from other countries without the approval of the Food
and Drug Administration. These organizations enabled patients to test the
efficacy and dosing of different experimental drugs without waiting for the
lengthy federal approval process (Lindemann 1994; Epstein 1995). Werner
describes how these buyers’ clubs functioned:
So what happened was gay men . . . weren’t going to sit by and just die. So people
started researching drugs that weren’t approved for use and drugs in other coun-
tries that were approved for other things that might have anti-viral activity and
might be used . . . then they would smuggle them in from other countries or would
8
In today’s medical marijuana markets, marijuana providers can sell marijuana legally under
state law to patients only if the patient presents a doctor’s recommendation.
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Making the Medical Marijuana Market
find ways to buy them . . . This was part of what was so incredible about it, they
would bring in these drugs and they would smuggle them in, they would research
and find them and they would write up . . . what the effects were, what people were
using for dosages.
(Interview April 23, 2012)
Justman, the security guard at Peron’s buyers’ club, describes Peron’s value-
rational hiring practices:
Dennis asked me . . . when you try to hire and replace, give people that are HIV
positive the first shot. He wanted to let them have something to do in life. Get
them out of the hotel. Get them out of the negative . . . and it was really wonderful.
A lot of people pushed people with HIV/AIDS away . . . We wanted to help people
with HIV/AIDS.
(Interview April 30, 2012)
The club’s value-rational ethos not only shaped hiring practices but also
influenced pricing decisions. Justman describes how the club tried to cater
to the poor and indigent:
Most of the people [we served] were very low income. Tenement housing clinics . . .
We didn’t have people drive up, get out, and come in and buy a hundred fifty dollars
[of marijuana]. We had people come up and get a three dollar bag or if they didn’t do
that we would be giving them [marijuana].
(Interview April 30, 2012)
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Cyrus Dioun
To get the answer you want you got to ask the right questions, you got to frame it
right. So I framed it in such a way, marijuana is medicine that helps people [who
are] sick and dying . . . As far as the potheads . . . too much cultural baggage . . . so my
main thing was with senior citizens and doctors and nurses . . . I realized I had to
9
In both the city of San Francisco and the state of California, citizens who collect enough
signatures can sponsor ballot initiatives that are voted on by the public, bypassing elected
representatives. If a ballot initiative is passed, it becomes law.
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Making the Medical Marijuana Market
get away from the potheads. I already got their vote . . . they had so much
baggage that I couldn’t carry them. Cultural baggage, long hair, whatever it
was. I’m a hippie, but I had to, not renounce it, but I had to put it aside for the
greater goals.
171
Cyrus Dioun
Conclusion
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Making the Medical Marijuana Market
developed a $4.5 billion market from the bottom up. It is likely that this
diffusion process was slower than it would have been if the federal govern-
ment had supported (or at the very least, no longer opposed) medical mari-
juana markets.10
Together, these findings suggest that scholars of institutional change should
consider both unsettled times and unsettled places. An exogenous shock—
even one with the global consequences of the AIDS epidemic—will not neces-
sarily have a uniform effect across geographies. San Francisco became the first
city to pass a medical marijuana initiative in response to the AIDS epidemic, in
part, because its population had the highest incidence of AIDS, and because
the most affected population, gay men, had developed political and social
capital while fighting for gay rights and inclusion in preceding decades.
Scholars of institutional change should focus not only on the social geog-
raphy of institutional change, but also on the political geography, particularly
the opportunities inherent in the structure of the state. The multi-level and
multi-centric structure of an open, federalist state means that even when a
rupture leads to rapid discontinuous change at one level of government,
extant institutions at another level of government may slow the diffusion of
markets, moderating the pace of institutional change.
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Ackrell Capital, a financial firm that covers the cannabis industry, estimates that a legal
national marijuana market would exceed $40 billion in annual revenue (Ackrell Capital 2016).
173
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176
10
Contested Illegality
Annette Hübschle
Introduction
The international community declared a total ban on the trade of rhino horn
in the late 1970s. Despite regulation and a variety of extraordinary conserva-
tion, protective, and security measures, the illegal killing of rhinoceroses
(hereafter “rhinos”) continues to plague rhino range states.1 An average of
three rhinos are poached and dehorned in the southern African bush each
day. At the current rate of attrition, wild rhinos are likely to go extinct in our
lifetime. The analytical focus of this chapter is on South Africa, which is the
greatest African rhino range state, hosting nearly 80 percent of the continent’s
rhinos. This chapter shows that banning an economic exchange is not a
straightforward political decision but a protracted process that may encounter
unexpected hurdles along the way to effective implementation and enforce-
ment. While political considerations informed the decision to ban all trade in
rhino horn initially, diffusion of the prohibition was uneven and lacked social
and cultural legitimacy among key actors affected by the ban and its impact.
This chapter starts with a theoretical framing, introducing the notion of
“contested illegality.”2 Important market actors thus justify their participation
1
Range states are countries in which specific populations of wildlife occur “in the wild.” South
Africa, Namibia, Kenya, and Zimbabwe are the main African rhino range states.
2
The research for this chapter derives from a doctoral research project, which followed flows of
rhino horn from the source in southern Africa to illegal markets in Southeast Asia. The multi-sited
ethnography included participant observations, interviews, and focus groups with more than 420
informants during fourteen months of fieldwork. The sample comprised, among others, convicted
and active rhino poachers, smugglers and kingpins, private rhino breeders and hunting outfitters,
Annette Hübschle
Contested Illegality
African and Asian law enforcement officials, as well as affected local communities, and Asian
consumers. Court files, CITES trade data, archival materials, newspaper reports, and social media
posts were also analyzed to supplement findings and to verify and triangulate data from interviews,
focus groups, and observations.
3
It is acknowledged that the state is not a unitary actor. For the purposes of this argument, the
state and its different arms of governance are presented as a homogenous entity.
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Contested Illegality
4
Steiner and Trespeuch (2013: 144) define “contested markets” as “markets in which contested
commodities are bought and sold.” The authors build on Radin’s conception of contested
commodities, which are goods whose consumption may be open to moral challenges.
179
Annette Hübschle
The most common form of rhino horn procurement involves the illegal
killing of rhinos (rhino poaching) in protected areas or on private land.
Typically, a group of three poachers will launch an illegal hunting party
with clearly defined roles during the hunt: those of the hunter, the tracker,
and the food and water carrier (who carry the horns on the return trip if the
hunt is successful). Once “harvested,” the horns are first taken to domestic
and then international transport hubs, from where they are transferred to
consumer markets. The diversion of rhino horn from legal sources such as
trophy hunting, private and public rhino horn stockpiles, or live animal is
another source of rhino horn. The case study in this chapter illustrates the
manipulation and diversion of seemingly legally procured rhino horn into
illegal markets. Gangs of thieves also steal rhino horn from private collections,
state-owned or private stockpiles, museums, and galleries across the globe
(EUROPOL 2011; Milliken 2014). An unknown amount of previously “har-
vested,” even antique rhino horn, horn artifacts, and hunting trophies are
either in circulation or safely stowed away. Due to the high value of rhino
horn—ranging between USD 45,000 and USD 120,000/kg at the time of
5
CITES came into force in 1977. Any wildlife products that predated the enactment of CITES
can be traded in most CITES member states provided that provenance can be shown.
180
Contested Illegality
After Jan van Riebeeck and the Dutch East India Company arrived at the Cape
of Good Hope in 1652, the lives and fortunes of local African people and wild
animals changed forever. In the process of colonization, Africans lost property
and hunting rights, and systemic exploitation was instituted first by colonial
rulers, and subsequently reinforced during the apartheid regime. The scales
tipped towards overexploitation of the still abundant wildlife shortly after the
European colonizers arrived. The first colonial administrator Jan van Riebeeck
decreed the first poaching law a mere five years after landing at the Cape. He
declared wild animals as res nullius. According to this legal principle, whoever
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Annette Hübschle
captured or killed a wild animal, owned it (Couzens 2003: 4). Despite the
restricted access to firearms, hunting dogs, as well as the withdrawal of hunt-
ing and landownership rights, African people received the blame for the
annihilation of wildlife during colonial times. With historical hindsight, a
confluence of destructive forces—such as agricultural transformation, mod-
ernization, and industrialization—seem to have played their role, while the
hunting by the colonial landowners was equally devastating for wildlife num-
bers (Carruthers 1993: 13). A significant aim of the early hunting laws was the
creation of an African workforce that was reliant on income from wages for
their livelihoods. Many Africans had maintained their economic independ-
ence from European settlers by hunting and trading wildlife and carried on
with their pastoralist and agricultural lifestyles. Through the hunting ban and
other colonial measures, the colonial masters created a workforce consisting of
individuals who were no longer self-sufficient and depended on income from
working in mines and other industrial endeavors (Carruthers 1993: 13).
While the early wildlife-protection measures served the colonial objectives,
later measures were driven by the desire to preserve wildlife for sports hunting.
At the turn of the nineteenth century, game reserves were designed to provide
“free from all human interference, a sanctuary in which certain species of
wildlife could prosper” (Carruthers 1993: 13). The early game reserves of Trans-
vaal, for example, were to be located on land considered barren, disease-ridden,
and worthless to mining interests. Eventually these “state game farming enter-
prises” were to be opened to sportsmen, who would pay the state for hunting
privileges (Carruthers 1993: 14). While the land devoted to game reserves was
uninteresting to other industries, national and provincial parks were estab-
lished on sought-after real estate. These parks entail “the utilization of an area
through active management for the benefit of the ecosystem and visitors.”
Thus, game reserves and national parks had different aims and legal founda-
tions. While game reserves could be established and abolished by proclamation,
national parks were legally secure and economically viable (Carruthers 1993:
13). Indigenous and local African property and hunting rights, and ancestral
burial grounds (which are significant cultural sites) were not considered when
reserves and parks were proclaimed during the twentieth century.6
The National Party came to power in South Africa in 1948, which paved the
way for a whole range of race laws and policies that affected all aspects of social
6
More than half of the area of the Kruger National Park is subject to land claims by local
claimants in post-Apartheid South Africa.
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Contested Illegality
7
Until the 1980s black visitors to the Kruger Park could only stay overnight at the rudimentarily
equipped Balule tented camp. Economic deprivation through apartheid restricted access further as
few Africans had access to cars and disposable income to afford vacations (Cock and Fig 2000: 132).
8
Namibia also allows private ownership of wildlife, including white rhinos. However, black
rhinos (given a global population of fewer than 5,250 black rhinos, the species is considered
critically endangered) form part of a state-controlled custodian program. Communities and
private individuals thus may lease rhinos from the state.
9
Transvaal was one of the four provinces in apartheid South Africa.
10
A multi-strand nine-foot fence designed to keep wild animals inside the game ranch
constituted the minimum standard of adequate enclosure (Reilly 2014).
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Annette Hübschle
105 of 1991 (Glazewski 2000: 428). Upon enactment, the law further pro-
tected the landowner’s rights of ownership of game in cases where game
escapes or is lured away from the landowner’s “sufficiently enclosed” land
(Glazewski 2000: 428). Beyond fencing in wild animals and claiming owner-
ship rights both over land and wild animals this move led to the further
alienation and deprivation of rural African communities, restricting their
access to land and resources. Once these property and ownership rights had
been asserted, subsistence hunting on game farms was inevitably branded as
poaching, and accessing private land for the purposes of seeking grazing,
water, or medicinal plants was deemed to fall under the criminal offence of
“trespass.” The apartheid regime employed this category of crime to prevent
black South Africans from moving around freely in demarcated “whites-only”
areas, which included parks, private land, and towns. Dangerous wild animals
were to be contained within game fences, which effectively determined “no-
go areas” for local communities. If a farmer were to find an unknown black
person “trespassing” on the land, the latter ran the risk of being shot on sight.
The waiver of the res nullius principle entrenched by the new regulation also
strengthened the relationship between the apartheid state and the white
farming community, one of its main political powerbases.
The white rhino has an important role in the drive to privatize wildlife in
South Africa. The number of white rhinos in the Hluhluwe-Umfolozi Game
Reserve11 in KwaZulu-Natal was reduced through unrestrained hunting to
about fifty to seventy animals in the early twentieth century and locally went
extinct elsewhere in South Africa. Through successful breeding and conser-
vation programs within the protected area, however, white rhino numbers
started to increase by the 1960s. When rhino numbers began to exceed
carrying capacity, conservators feared that an outbreak of disease could
halt the recovery of white rhino numbers. It was at this point that the
Natal Parks Board12 commenced “Operation Rhino,” which over the course
of the 1960s and early 1970s saw more than 1,200 white rhinos relocated
from the Hluhluwe-Umfolozi Game Reserve to the Kruger Park, white-owned
private game reserves, as well as zoos and safari parks abroad (Player 2013).
The Natal Parks Board had envisaged that the provision of white rhinos at
low cost to private landowners would render them effective custodians of
rhinos. The first white rhinos were sold to private landowners at highly
subsidized prices in 1963. To parks authorities in South Africa, the sale of
live rhinos to private operators constituted (and continues to do so) a much-
needed cash injection.
11
South Africa’s oldest proclaimed nature reserve is now known as the Hluhluwe-iMfolozi Park.
12
The former province of Natal has been known as KwaZulu-Natal since the end of apartheid,
and its parks authority is known as Ezemvelo KZN Wildlife, the former Natal Parks Board.
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185
Annette Hübschle
negative listing (Sand 1997: 20). Twenty-one states signed the Convention
initially, which placed 1,100 species in the Appendices. Although it was a
pariah state in the international community at the time, apartheid South
Africa was one of the original signatories of the treaty.
Species are considered for inclusion in or deletion from the Appendices at
the Conference of Parties (CoP), held every three years. Appendix I provides a
list of species threatened with extinction and thus commercial trade in wild-
caught specimens of these species is illegal (CITES 2002).13 Species listed under
Appendix II are not necessarily threatened with extinction but may become
threatened unless trade is subject to strict regulation to prevent extinction in
the wild. International trade may be authorized by the presentation and
granting of an export permit or re-export certificate (CITES 1973). Appendix
III relates to species, which were listed after one state party asked other state
parties for assistance in controlling trade in a specific species. These species are
not necessarily threatened with extinction globally. Trade is only authorized
by way of an appropriate export permit and a certificate of origin (CITES
1973). CITES allows for some room to manoeuver when it comes to the
listing of species where the conservation status of a species differs across its
range. So-called “split listing” refers to cases in which “different populations
or sub-species are in different Appendices and [in which] a population (or sub-
species) may be listed and another may not” (Willock 2004: 15). Rhinos are an
example of “split listing,” as white rhinos in South Africa and Swaziland were
moved to Appendix II after the initial absolute trade ban.
In the early years of the Convention, CITES parties placed all rhino species
in Appendix I, effectively banning international trade except under excep-
tional circumstances (Milliken and Shaw 2012: 44). The split listing that
allowed the listing of South African populations of white rhino to be moved
to Appendix II happened in 1994. With this move, CITES parties recognized
the huge strides made by South Africa in terms of rhino population and range
growth. An annotation confined permissible trade in live rhinos to “accept-
able and appropriate destinations and hunting trophies only” (CITES 1994).
While CITES regulates international trade, individual states have to transpose
the CITES stipulations into national law, and regulate domestic trade of
endangered species. It is thus legal for live animals and hunting trophies to
be exported from South Africa to elsewhere in the world. Once live rhinos
or hunting trophies leave African shores, national regulatory agencies relin-
quish their responsibilities to authorities in receiving countries. While
passing through international airspace, waters, or transit countries, there are
13
The trade of captive-bred animals or cultivated plants of Appendix I species are considered
Appendix II specimens with the concomitant requirements (CITES 2002). In other words, so-called
Appendix I species can be traded if they do not derive from wild populations.
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Contested Illegality
14
Trade bans can lead to loss of income for public institutions, protected areas, and local
communities. In addition, regulators have to transpose “downlisting” or “uplisting” decisions into
local laws, which costs money, time, and resources.
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Annette Hübschle
It is crazy that these old colonial institutions are still in place. CITES decides how
much and what we can sell. We stock about 90 percent of the world’s rhinos. So
who are they to prescribe to us? I mean we are in a controlled area, where we
manage stock. We know what we are doing and we are trying to protect them for
our children.
(Interview with law enforcer 3, 2013)
The significance of perceptions such as the one expressed here is that they
affect the diffusion and acceptance of CITES at the local level. As will be shown
in the next section, South African regulations such as the Threatened or
Protected Species regulations (TOPS) and the moratorium on the domestic
trade in rhino horn lack support and legitimacy among key constituencies in
South Africa. In essence, the perceived unfairness of CITES as an international
instrument that impacts conservation and trade also affects the legitimacy of
domestic laws, ordinances, and regulations in South Africa and other range,
transfer, and consumer countries.
While the apartheid regime was one of its original signatories, it failed to
honor its international obligations under CITES other than passing piecemeal
regulations to ensure favorable CITES decisions (such as the “downlisting” of
white rhinos from Appendix I to Appendix II). On the election of the first
democratic government in 1994, a new constitution cleared the way for the
transformation of laws, policies, and the apartheid bureaucracy in South
Africa. Environmental rights, sustainable development, and the use of natural
resources became enshrined in the new constitution (Republic of South Africa
1996: 6). The protection of the environment—and by extension, the rhino—is
thus considered and guaranteed by the highest law of the land. In the period
immediately following the end of apartheid, several significant events
impacted the state of nature conservation, known as “environmental affairs”
under the new dispensation. On the eve of the first democratic elections, the
former four provinces and homelands were sub-divided into nine provinces.
The new environmental affairs bureaucracy was transformed and many for-
mer public servants from the old regime opted out by accepting retrenchment
15
European Union member states have a common position at CITES meetings and vote as a
block. In July 2015, the European Union became a member of the Convention.
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189
Annette Hübschle
190
Contested Illegality
the preferential status quo, the post-apartheid state is associated with intro-
ducing new rules, which are believed to aim at dispossessing and emasculating
white landowners. Sentiments of a loss of privilege (the right to determine
what happens to their property), deprivation, and entitlement were expressed:
“the government is out to get us.”
The focus of this section is the “production” of rhino horn on private land,
which constituted the principal source of supply of South African rhino horn
between the late 1960s and late 2000s. Actors capitalize on loopholes within
the regulatory framework. Involved are members of the wildlife industry16
with intimate knowledge of the product (rhino horn) and of the institutional
and legislative framework governing the international trade of rhino
horn. These actors belong to influential and transnational social networks
with links to political and economic elites in supply, transit, and consumer
countries. Different modes of horn “production” on private land share the
commonality that perpetrators display detailed and extensive knowledge of
the rules and how to bypass, flout, or break them, or how to exploit legal
loopholes. While wildlife professionals and rhino owners tend to regard the
law (NEMBA), the regulations (TOPS regulations), and the moratorium on
domestic trade as responsible for the surge in poaching, the regulatory
framework did not emerge from a vacuum. In fact, the first rules governing
the management and specifically the hunting of wildlife were passed during
colonial times. The breaking or flouting of hunting rules was seen as a minor
transgression (unless it involved indigenous hunters or Afrikaners) and, in
some cases, it was a rite of passage. A double morality legitimizes modern rule
breaking, partially linked to a sense of entitlement and privilege, and a
“silent rebellion” against the new rule makers and “their rules.” A wildlife
expert explains (interview, 2013):
The way it used to work, the law was always there but nobody ever pushed it.
Within 48 hours of the guy getting the horn, you had to go to nature conservation
and get a chip in. And then you could apply for a permit and sell it. As you had a
permit to sell and trade, they never kept track of anything. You could sell without
anyone noticing or caring. And because it wasn’t really checked on, if you had a
permit for one horn, you could use it for weeks or months. So what a lot of people
16
The term “member of the wildlife industry” refers to any person involved in the transporting,
translocation, well-being, management, farming, breeding, hunting, or securing of wildlife on
private or public land.
191
Annette Hübschle
miss is not only the entitlement that the farmer feels and that he is truly entitled
to. He just bought this, most of them come from the park.
The quotation above refers to the most common form of permit fraud prior to
the implementation of stricter regulations and enforcement (interviews with
law-enforcement officials and conservators, 2013). Wildlife professionals would
use the same permit to shoot and dehorn multiple rhinos. Or, as was the case in
some provinces—most notably in the northern Limpopo Province—wildlife
professionals could use a “standing permit” for white rhino hunts on certain
properties. In other words, hunting outfitters applied for a blanket permit once
and thereafter they hunted without further permits and state supervision on
these properties until August 2008 (Milliken and Shaw 2012: 38; interviews
with wildlife professionals, 2013). The existence of legal trade channels allows
for early-stage conversion of an essentially illegally harvested wildlife product to
a legal export product. The ban itself is ambiguous as it only concerns inter-
national trade of rhino horn, leaving space for illegal market actors to maneuver
at the national level.
A few South African court cases showcase the involvement of rhino breed-
ers, professional hunters, veterinarians, nature conservation officials, and
others in the illicit “production” and trafficking of rhino horn.17 These actors
from the formal or “legal” sector not only orchestrated poaching in private
and public conservation areas and theft from rhino horn stockpiles; they were
also involved in complex schemes that bypass existing conservation regula-
tions, exploit regulatory loopholes, and use legal trade channels to export illegally
obtained rhino horn. Alleged rhino poaching trafficker Dawie Groenewald
and his accomplices—known as the Groenewald gang or the “Musina
group”18—illustrate a cunning instrumentalization of the legal/illegal inter-
face. The rhino poaching syndicate currently faces 1,736 counts of racketeer-
ing, money laundering, fraud, intimidation, and illegal hunting and dealing
in rhino horns in South Africa, while a US indictment alleges that the Groe-
newald siblings sold illegal hunts to US trophy hunters (Grand Jury for the
Middle District of Alabama 2014). According to the South African criminal
indictment (compare with National Prosecuting Authority 2011), Groenewald
and his accomplices were involved in intricate scams, ranging from false
permit applications through to illegal dehorning of rhinos and the laundering
of unregistered rhino horns. Rhinos and rhino horns were acquired through
a variety of grey and illegal channels. Among Groenewald’s co-accused are
17
These “big” cases revolve around Dawie Groenewald (case study is discussed in this chapter),
Hugo Ras, and Chumlong Lemthongthai.
18
Musina is a border town in the Limpopo Province. Dawie Groenewald’s farm called Prachtig is
located near Musina and most of the South African wildlife professionals with direct links to his
criminal network live in the town or nearby.
192
Contested Illegality
wildlife veterinarians, professional hunters, a pilot, farm laborers, and two wives
(his own and the wife of wildlife veterinarian Karel Toet), who assisted with the
permit applications and other administrative tasks. The Groenewald gang
entered into business ventures with rhino farmers and wildlife professionals,
many of whom were unaware that they were breaking the law at the time.
Groenewald hunted numerous rhinos illegally on his farm Prachtig in the
northern Limpopo Province (the indictment alleges that he illegally hunted
fifty-nine of his own rhinos) and procured live rhinos and rhino horns from
other rhino farmers. It is alleged that he dehorned rhinos and sold at least 384
rhino horns over a four-year period ( Jooste 2012). In terms of NEMBA, separ-
ate permit applications have to be tendered to dehorn a rhino, to transport
rhino horns, as well as to possess rhino horn. According to Colonel Jooste’s
affidavit ( Jooste 2012: 14),19 the Groenewald gang flouted these rules on
numerous occasions. The carcasses of rhinos that were illegally hunted, killed,
and dehorned on Prachtig were either sold to a local butcher,20 buried, or
burnt ( Jooste 2012: 11). Socially embedded in the southern African wildlife
industry with strong business connections to the consumer market (Vietnam),
as well as extensive knowledge of legal market processes and loopholes,
Groenewald was in an excellent position to procure high volumes of rhino
horn through grey and illegal channels. Many horn-procurement methods
crossed the fine line between legality and illegality. Although it was illegal to
hunt and dehorn rhinos without the required paperwork, the gang portrayed
their criminal and grey activities as legitimate business enterprises. Moreover,
the privatization of rhinos and the entitlement to do “as you please with your
own property” allowed many criminal and grey activities to go undetected for
several years. The outcome of the Minister’s constitutional appeal to reinsti-
tute the domestic moratorium may affect the outcome of the court case. If the
Constitutional Court were to dismiss the moratorium, then Groenewald could
argue for charges involving domestic trade exchanges of rhino horn to be
dropped from the charge sheet.
Pseudo-hunting, illegal hunting of rhinos on private land, rhino horn
laundering, and grey traffic were the primary modes of rhino horn supply
until rhino poaching took off in national and provincial parks, as well as in
private game reserves in South Africa in the late 2000s. Essentially, grey traffic
paved the way and laid the transport routes for the high volumes of rhino
horn leaving southern African shores for Asian markets. Groenewald and his
ilk had access to wide-ranging social and professional networks that facilitated
illegal and grey transnational trade with Asian partners. The displacement of
19
Colonel Johan Jooste heads the Endangered Species Unit at the Directorate for Priority Crime
Investigations, South Africa’s organized crime fighting unit.
20
Thirty-nine carcasses were sold to a local butcher between 2008 and 2010.
193
Annette Hübschle
Conclusion
The illegalization of the trade in rhino horn commenced in the late 1970s
when the multilateral environmental treaty CITES entered into force. Prior to
that, economic exchanges involving rhino horn were either legal or undeter-
mined. The diffusion of the trade ban to the domestic level in range, transit,
and consumer countries has succeeded to varying degrees.
The chapter highlights how important actors at the source do not accept the
law on the books for a variety of reasons, including the perceived unfairness of
the ban, divergent social or cultural norms that clash with the ban, and for
politico-historical reasons. This sentiment is replicated further along the rhino
supply chain. Dioun’s chapter on marijuana markets in the United States
shows that the process of legalization is protracted, encountering many insti-
tutional hurdles. In the case of rhino horn, the process of illegalization is an
ongoing negotiation with divergent views among producers and regulators
concerning whether trade in rhino horn should be illegal in light of its
economic contribution to the private and public sectors in South Africa, as
well as the social and cultural legitimacy of its use among key market partici-
pants (for more details about the cultural and social legitimacy of rhino horn
consumption, see Hübschle 2016).
The chapter also shows that apartheid state actors facilitated the economic
valuation of rhino horn on the supply side by facilitating the privatization of
white rhinos. While current narratives focus on rhino poaching within con-
servation areas such as the embattled Kruger National Park (which hosts 40
percent of the world’s remaining rhinos), rogue elements within the wildlife
industry “set up the rhino horn pipeline to Asia” (interview with organized
crime investigator, 2013). Bolstered by sentiments of contested illegality,
wildlife professionals have no qualms about exploiting or bypassing regula-
tory loopholes (as shown in the Groenewald case). The interface between
legality and illegality thus relates to agents of the state facilitating illegal
flows, the existence of legal and illegal means of horn supply, and legitimate
and illegitimate uses of rhino horn. The appropriation of legal trade channels
(for example, hunting trophies) and exploitation of legal loopholes (domestic
trade) suggests not only an interface between legal and illegal markets for
rhino horn but that illegal economic activities are firmly embedded in legal
194
Contested Illegality
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11
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Introduction
fourteen-year civil war that ended in 2002. In an effort to end the trade in Sierra
Leonean “blood diamonds” the country’s diamond sector has since been exten-
sively reformed. However, the illegal production, trade, and export of Sierra
Leonean rough diamonds persists, albeit on a significantly smaller scale.
The survival of the illegal diamond market in the post-conflict society is not
surprising given that fragile, and in particular post-conflict societies, are
hardly ever able to implement the law and sanction illegal action effectively
and coherently. However, it does raise the question of the social organization
and definition of legal and illegal economic action in a context in which “the
law” does not play the role of a powerful and consistent regulator of the
economy. This is particularly relevant in a social and political context in
which a variety of actors (national and international, state and private) strive
for tangible change of market governance with the aim of abolishing the
illegal trade and its perceived harmful externalities. How does this context of
imperfect, yet increasing statehood affect the social structure of the illegal
market? How do illegal market participants navigate their business between
long-lasting practices of trade and changing market governance?
The findings presented here are the result of six months of field research in
Sierra Leone, conducted in 2012 and 2013. During field trips to four regions of
the country I interviewed legal and illegal diamond miners, traders, and export-
ers, as well as state agents, national and international non-governmental organ-
ization staff, and journalists. In addition to single and serial in-depth interviews
with a variety of market actors I conducted open, non-participant observation
at artisanal diamond mines, buyers’ offices, illegal market places, and police
checkpoints on border routes.
Based on the data collected during the field research this chapter argues that
illegality under conditions of limited statehood cannot be understood without
studying the social meaning and, in particular, norms of appropriateness,
attributed to illegal market action (see also Mayntz in this volume). The
argument brought forward here is threefold: contrary to conventional wisdom
about illegal economic action in fragile states, I will show that in the case of
the illegal diamond market in Sierra Leone, the lack of law enforcement
cannot be explained solely by the weak capacity of actors tasked with imple-
menting the laws and regulations governing the diamond sector, but, more
importantly, by a lack of willingness. This lack of willingness is particularly
notable and influential at the local level of state governance where state actors
largely pursue a laisser-faire approach toward illegal market action that defies
the formal regulation of the market. Contrary to common conceptions about
the nature of weak statehood in Africa, the toleration of illegal action cannot
be explained primarily by corruption of enforcement agents. Instead, the
relationship between the illegal market and the state is shaped decisively by
norms of appropriateness according to which a large part of illegal economic
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1
This can be observed clearly in the study of organized crime and transnational illegal
trade. Although plenty of studies examine illegal phenomena in weak and illegitimate states,
they do not usually take into account the nature of statehood, conceptually or in their policy
recommendations. With the exception of studies that stress the need to protect precarious
livelihoods, this strand of literature largely still pursues a law enforcement-oriented approach,
regardless of the state of the security institutions, the judiciary, or the prison system in question.
In such a “rigorous” understanding of legality and the rule of law, non-enforcement and informal
state control are viewed as pathological (Schuppert 2011: 40).
200
“We Are the Genuine People”
assumptions are particularly useful for the study of legal realities under con-
ditions of limited statehood (Kötter 2009: 657); in other words, in a context
in which the nature of state territory, nation, and legitimate authority are
contested.
The dominance of a positivism of the written law in the study of crime
constitutes a considerable problem for the analysis of illegal markets under
conditions of limited statehood. As theorists of law and statehood have
pointed out, legality not only empirically but also conceptually depends on
legitimate authority, which is usually assumed to be the authority of the state
(Schmelzle 2011; Kötter 2008, 2009). If an act is prohibited by the letter of the
law, but non-compliance is never sanctioned, this act is only de jure and not
“effectively illegal” (Paoli et al. 2009). However, the blatant illegitimacy of a
regime (whether attributed from an empirical or a universal moral standpoint)
can also call the validity of its legal rules into question. This is evidenced, for
example, by decisions by German courts that retroactively declared void
several laws of the GDR and National-Socialist regimes (Kötter 2011).
In order to conceptualize legality in contexts in which the state’s legitimate
authority and implementation capacity are severely limited, it is thus useful to
revert to literatures that take into account the formal law, the “law in action,”
and the political system in which laws are created and implemented. The
proposed concept of legality draws on two literatures. First, theories of law
that distinguish between the formal, the empirical, and the ethical dimen-
sions of law (Geiger 1987; Alexey 1994; Kötter 2011). In this understanding, a
legal norm is juridically valid if it is codified in the applicable body of law. In
contrast to this purely normative dimension, the social validity of a legal norm
refers to the effectiveness of the law. Effectiveness is derived from compliance
(based on the morally motivated or self-interested validity-beliefs of the
addressees) and the sanctioning of deviance. In other words, the social or
empirical dimension of the law concerns the “legal culture” of a society from
a sociological, historical, or anthropological perspective (Alexey 1994; Kötter
2008, 2009; Tamanaha 2014). It specifies not whether a norm should be, but
whether it is followed and enforced. In addition to the direct outcomes of legal
norms their complex and broader impact—for example on the behavioral
motivations of legal and non-legal actors—is of interest to researchers of the
empirical reality of law (Wrase 2013). Lastly, the moral validity of the law
concerns whether a legal norm is legitimate from the standpoint of moral
philosophy.
Second, the chapter draws on the literature of “informal markets” that have
long pointed to the divergence between legally and socially legitimate eco-
nomic practices (Hart 1973; Webb et al. 2009). Studies of the market–state
relationship in this field have pointed out that formally illegal economic
activity in contexts of limited statehood (i) is often employed as a coping
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During the civil war years, the Sierra Leonean diamond market repeatedly
made the news as a largely criminal and violence-fueling economy. All war-
ring factions were at some point accused of having a stake in the illegal
diamond economy. Sierra Leonean rough diamonds were smuggled and
traded in exchange for weapons and supplies. Because they could be used as
an alternative currency, Sierra Leonean diamonds attracted money launderers,
organized crime groups, and terrorists. The public outrage that followed
successful media campaigns by international human rights organizations
denouncing the trade in Sierra Leonean and Angolan “blood diamonds”
202
“We Are the Genuine People”
induced regulation of the trade in rough diamonds on a global scale. Since its
creation in 2003, nearly all diamond-producing countries have become mem-
bers of the Kimberley Process Certification Scheme (KPCS), a global regulatory
regime that requires its members to prove the source of rough diamonds via
state-issued certificates of origin.
The Sierra Leonean civil war ended in 2002 after a robust international
intervention drove the rebels out of the mining territories of Kono. Sierra
Leone became a member of the KPCS in 2003. In line with the stipulations
of the KPCS and with considerable support from international donors, the
country took significant action to legalize the market. In addition to the
introduction of unforgeable KP export certificates, it undertook reforms of
the state institutions governing the diamond sector. These include the estab-
lishment of a National Minerals Agency (NMA), the creation of several spe-
cialized law-enforcement units, the professionalization of border controls at
Lungi International Airport, and the introduction of a rotation system of
independent international diamond valuators at the Government Gold and
Diamond Office (GGDO). The regional offices tasked with overseeing dia-
mond mining and trading in the diamondiferous territories, as well as the
GGDO, now fall under the auspices of the newly founded NMA, instead of the
Ministry of Mines, hereby separating the implementation of mining regula-
tion from its development.
2
The annual cost of an artisanal diamond mining license is 250,000 leones (63 USD at the time
of writing) per acre, excluding monitoring and environmental rehabilitation fees; a trading license
costs 1,500 USD per year for Sierra Leonean citizens and 2,000 USD for Economic Community of
West African States citizens; an exporter’s license costs 35,000 USD. In addition to the formal costs
of acquiring a license, market participants are usually required to give “handshakes”—bribes—to
government officials and chiefs at various points during the licensing process.
203
Nina Engwicht
3
Apart from the illegal production and sale of diamonds, legal and illegal market actors can
break the law regulating the diamond market in a number of other ways, for example by violating
legal stipulations concerning labor law, environmental as well as health and safety standards, or
the prohibition of child labor. These practices, while illegal, will however not be considered part of
the illegal market, as they occur in every market.
204
“We Are the Genuine People”
The “formal” rules of the Sierra Leonean diamond market stipulate that
diamonds must be traded only between legal market participants—from
licensed miner to licensed dealer to licensed exporter—and that sales must
be documented, so as to create a legal and transparent value chain. The reality
deviates quite far from this ideal. Not only are Sierra Leonean diamonds still
illegally mined, traded, and smuggled on a considerable scale;4 in addition,
the legal and the illegal diamond markets are closely interwoven, making it in
many cases impossible to determine the source of a diamond.
Legal dealers and exporters buy diamonds from illegal miners and dealers all
the time. As diamonds are a scarce resource, legal market actors will try to buy
them, if given the chance, regardless of the source. In fact, it is a broadly
understood norm, explained by legal buyers and state agents alike, that
illegally sourced diamonds must be bought by legal dealers and exporters so
as to prevent smuggling. If they are not absorbed by the legal market, so goes
the reasoning, they will leave the country illegally, thereby depriving the
Sierra Leonean state of much needed tax income. This way, the vast majority
of diamonds that have been illegally produced or traded find their way into
legal market channels and are ultimately exported as legal diamonds. While it
is understandable that dealers buying illegal diamonds seek to justify their
actions, interestingly, this practice enjoys considerable support among state
agents who argue that turning a blind eye to this practice is a necessary evil,
because diamonds from the illegal market would otherwise be smuggled out of
the country.
As market actors are supposed to document their transactions by recording
the characteristics of the goods and the license numbers of buyers and sellers,
the legalization of illegal diamonds usually requires the falsification of records.
In particular, buyers need to acquire a license number for diamonds that come
without documentation. License numbers for illegal diamonds can be sourced
in a number of ways: if the buyer is in possession of one or several mining
4
The scope of illegal economic activity is, by its very nature, impossible to measure. The drastic
increase in diamond exports in the post-war period from a value of 26 million USD in 2001 to 163
million USD in 2012 suggests a significant decrease in diamond smuggling. Small-scale illegal
mining and trading are associated mainly with the artisanal mining sector that still comprises
about 50 percent of diamond production and provides a livelihood for around 500,000 Sierra
Leoneans (Government of Sierra Leone 2013). Nevertheless, evidence suggests that large-scale
illegal activities may be strongly connected to legal corporations, which are able to smuggle large
quantities of diamonds, hide their proceeds, and bribe enforcement agents with ease. This became
apparent in interviews with international businessmen in the mining sector and is supported by
recent reporting about the involvement of the owner of Sierra Leone’s biggest diamond-producing
company in corruption and tax evasion in the Sierra Leonean and Guinean mineral sector (Sharife
and Gbandia 2016).
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Nina Engwicht
licenses they will, upon purchase, use one of their own license numbers,
thereby recording the diamond as a product of their own mine. Alternatively,
they can use a mining license number from a friend or colleague, usually
in exchange for a small “commission.” One dealer reports that he regularly
receives lists of artisanal mining license numbers from the regional mines
office, which he uses to legalize illegal diamonds, supposedly unbeknownst
to the owner of these license numbers.5 However, several legal exporters also
report the existence of a “gentleman’s agreement” between legal exporters
and the Ministry of Mines, which allows them to leave a blank space where
they would have to record the license number of the seller when presenting
their goods for exportation at the Government Gold and Diamond Office in
Freetown. This agreement is viewed as a compromise that allows legal actors to
buy illegal diamonds without “cheating” the state.6 Especially for smaller
gems (which represent the vast majority of Sierra Leonean exports),7 the
state-tolerated legalization of illicit diamonds through integration into the
legal market constitutes the norm.
The crucial figures that connect the legal and the illegal segment of the
diamond market are the “banabana”—also called “jula” or “njeko-njeko” (Levin
and Gberie 2006). The banabana are middlemen who buy diamonds from
miners or dealers, both legal and illegal, and sell them on to legal and illegal
dealers and exporters. Often strapped for cash, they also broker deals between
sellers and buyers for commission. While they sell to legal and illegal buyers
alike, most of their sales are to legal buyers. The vast majority of artisanally
mined diamonds pass through the hands of banabana before they leave the
country. Since banabana are unlicensed dealers, the diamonds they trade
become untraceable, regardless of the legality or illegality of their extraction.
While most banabana, especially those living in the provinces, are impover-
ished, some brokers trade goods of high value and acquire considerable wealth.
Most of the time transactions between the legal and the illegal market
involve the legalization of formerly illegal diamonds, though in some cases
5
If illegal diamonds are not legalized in Sierra Leone, but smuggled to a neighboring country or
overseas, they can also be channeled into the legal diamond market in the receiving country. Legal
and illegal market actors unequivocally report the ease of selling illegal diamonds to legal buyers on
the international market, including in Antwerp, the most important turning wheel for rough
diamonds from all over the world.
6
However, this agreement was contested. In early 2013 the newly founded National Mineral
Agency tried to abolish the practice by letting local diamond dealers know they could no longer
present diamonds without record of the source at the GGDO. Consequently, the biggest Lebanese
exporters arranged for a meeting with a senior representative of the Ministry of Mines to protest the
new rules. Their objection was, as one of the participants explained, successful in preventing a
change to the informal rule.
7
Around 80 percent of Sierra Leonean gem-quality diamonds falls into the “Melee” category,
which classifies diamonds weighing under 0.15 carat (Government Gold and Diamond Office
2012).
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“We Are the Genuine People”
formerly legal diamonds are sold into illegal channels, if they promise to be
profitable. In particular, money launderers, outsiders, and newcomers to the
Sierra Leonean diamond market—such as tourists or professional or non-
professional diamond buyers from overseas—often agree to buy diamonds
far above their local market price. In these cases, it is again the banabana that
usually facilitate the deal. In contrast to the legalization of illegal diamonds,
the illegalization of formerly legal diamonds is widely viewed as unacceptable.
It is condemned by state agents and taboo even among market actors.
While the cooperation between the legal and the illegal market will hardly
be surprising to students of illegal economic activity, their interrelations
seem unusually close in the Sierra Leonean case. Not only is their relation-
ship highly symbiotic, but the legalization of illegal diamonds is also widely
tolerated by law enforcement. Studies on security institutions in areas of
limited and post-conflict statehood usually explain this “failure” to enforce
the law with a lack of institutional capacity and the pervasiveness of corrup-
tion. The capacity argument is frequently invoked by representatives of all
levels of law enforcement who lament that those tasked with governing the
market are underfinanced and undertrained, making it impossible for them
to effectively monitor the market. Mines monitoring officers and mines
wardens employed by the regional branches of the NMA to oversee diamond
mining and trading activities complain about a general lack of financing
preventing them from traveling to remote mining locations, policing bor-
ders, and calling for backup. While these factors certainly impede effective
law enforcement in the diamond market, they are not the primary factors
preventing prosecution of illegal action in the diamond sector. Far from
being unable to detect illegal market activities, law-enforcement agents
frequently encounter illegal practices in their day-to-day work, which they
choose to tolerate. In other words, it is not that institutional actors cannot,
but that they will not enforce the law. This tacit approval of illegal market
action concerns a majority of illegal activities in the Sierra Leonean diamond
market, in particular illegal artisanal diamond mining and illegal diamond
dealing. While corruption does play a role in the toleration of illegal activ-
ities, it is not its single most important explanatory factor. In order to
understand the large-scale toleration of illegal diamond production and
trade by enforcement agents we need to take into account the social legit-
imacy of illegal activity. A large part of illegal activity in the Sierra Leonean
diamond market falls well within the bounds of appropriate social behavior.
To be clear, the argument put forward here is not that corruption and weak
institutional capacity do not matter, but that they alone cannot explain the
lack of law enforcement of the Sierra Leonean diamond sector. This has
important implications for state building as it would suggest that even if
law-enforcing institutions were better equipped to detect illegal activity
207
Nina Engwicht
and corruption were prosecuted, illegal market practices would still be toler-
ated as long as they are commonly regarded as rightful.
In the remainder of this chapter, I will outline six sources of legitimacy of
illegal action in the Sierra Leonean diamond market and explain how they
directly lead to state agents’ eschewal of rule enforcement.
8
This type of mining is commonly identified as “informal mining” in the academic literature.
This is misleading in the sense that there is no conceptual ambiguity about the legality and
illegality of diamond extraction in Sierra Leone. The term is often used in a performative sense
that aims to decriminalize impoverished miners by avoiding stigmatizing language. This is
informed by the assumption that referring to people as “illegal miners” depicts them as deviant
and as such illegitimate. The concept of informality, as it is often used, is in itself shaped by notions
of legitimacy and illegitimacy.
9
While interviewed enforcement actors sometimes claimed to have arrested illegal diamond
diggers, none of the interviewed miners reported having ever been arrested and tried in recent
years. Consistently, interviews with police and justice personnel in Kono did not corroborate even
a single case in which illegal mining had been tried in the regional Magistrate Court.
208
“We Are the Genuine People”
visit us. But we talk to them and they forgive us—because we have nothing.”
State actors at the local and regional level of law enforcement corroborate this
active toleration of illegal diamond mining for humanitarian reasons. Con-
sidering the dire living conditions of illegal miners, they stress the need to
exert their power of “discretion” and not submit illegal miners to cruel pun-
ishment. As one mine warden explains:
I greet them in the mining field. Sometimes I talk to the poor people just to
encourage them to work. Although I have rules and regulations that nobody is
allowed to mine without a license. But sometimes I can help them, to allow
them to work. They are thieves. But as a human being, I leave them to do their
job. Because they are poor people. They don’t have money for their living.
I will never arrest them. My duty is to arrest but I just use my brain, just to
help them.
More broadly, state agents frequently depict illegal mining as a tool to deal
with rampant unemployment, especially among the rural youth in the min-
ing regions. Unemployment and dissatisfaction among the young have fre-
quently been the cause of social tensions and have threatened the political
stability of the country in the past. In this sense, state actors justify the
toleration of illegal mining as a tool to ensure political stability by allowing
the poor to earn a living and to share the country’s resource wealth.
The same holds true, though to a lesser degree, for illegal diamond dealing
by small-time traders in the mining territories and in illegal marketplaces, so-
called Open Yai markets.10 Contrary to the miners, whose struggle for survival
has long been acknowledged by both researchers and policymakers, illegal
dealers are often depicted as illegitimate market actors, especially by protag-
onists of international state building and sector reform. Policy briefs, consult-
ancies, and internationally driven development projects generally strive to
“cut out the middleman” from the diamond value chain, namely the illegal
trader whose involvement is thought to unnecessarily drive up the price and
muddy the track of Sierra Leonean diamonds. On the local level, however,
market and state actors often equate illegal diamond dealing with unemploy-
ment. Traders spend their day sitting at the Open Yai waiting for customers
because “it’s better than sitting idly at home.” In fact, dealers are often also
miners who are seasonally or temporarily out of work. Like illegal diamond
production, dealing is more often than not a subsistence activity in which
actors engage to earn a modest income.
10
The term “Open Yai” (meaning “Open Eye” in the Sierra Leonean lingua franca Krio) refers to
public market places where diamonds are illegally dealt. At the same time, it refers to the
association of unlicensed dealers selling diamonds at these illegal market places. Open Yai
markets exist in all of the diamond-yielding territories of Sierra Leone. Equivalent market places
also exist for illegally mined gold.
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Nina Engwicht
Piecemeal Legality
Researchers of informal and illegal markets have highlighted that the line
between legal and illegal action is often nearly impossible to draw. In the
case of the Sierra Leonean diamond market one of the main reasons for the
blurriness of the border between the legal and illegal spheres is that illegal
market actors often fulfill a part of the formal requirements of legal market
11
Although it is safe to assume that these answers are at least somewhat influenced by social
desirability, this understanding of the nature of the post-war state was reiterated by market actors
and is reflected in the empirical actions of enforcement agents vis-à-vis citizens in the researched
context.
12
One interviewed state agent observes that it would constitute cruel and unusual punishment
to put illegal market participants into Sierra Leone’s horrific prison system for comparatively minor
offenses, such as illegal mining.
210
“We Are the Genuine People”
participation.13 This is particularly true for illegal miners who often obtain the
approval of the chief—who according to Sierra Leonean land law serves as the
custodian of land—for their mining operation and pay him a (non-formal)
surface rent. Both steps are part of the process of obtaining a legal mining
license (Government of Sierra Leone 2009a; Ministry of Mines and Mineral
Resources 2013). While the chiefs are thus integrated into the formal regula-
tion of the mining sector, they also frequently appear as informal agents of
market governance. In other cases, illegal miners produce diamonds in verbal,
but not formalized agreement with the respective license holder. Obtaining
the approval of authorities that are part of the legal process of obtaining a
license can lead to a situation in which market participants themselves are
unable to tell whether their activities are legal or illegal. Conversely, govern-
ment actors imitate the legal process of law enforcement when they non-
formally “fine” illegal market participants.
13
Van Bockstael (2014) observes the same in the Liberian mining sector.
211
Nina Engwicht
will often help their illegal counterparts when needed. When shortly after the
war Sierra Leonean police forces frequently raided illegal marketplaces in the
city of Koidu in an effort to end illegal diamond trading, the banabana enlisted
the help of the chairman of legal diamond dealers for the region. His negoti-
ation with law enforcement resulted in an agreement between the police
forces, the mining authorities, and market participants that the authority to
control all diamond-related activities lies solely with the regional mines office
and not with the police, and that illegal traders would largely be left to
conduct their business at the Open Yai markets. Similarly, when an illegal
broker was arrested in a Freetown hotel, the authorities released him after a
Lebanese exporter declared that he was brokering diamonds on his orders. The
entanglement between the legal and the illegal market is exacerbated by the
high degree of actor mobility between the two spheres. On one hand, many
participants in today’s legal diamond market started out as illegal miners or
traders; on the other hand, legal market actors can easily spiral back into the
illegal market if they cannot afford to renew their licenses. Since they are
commonly acknowledged as part of the legitimate market, illegal market
actors are even able to rely on the help of the state when cheated by business
partners. When a diamond was stolen from the Open Yai market in Zimmi, its
members not only called on the chairman of the legal dealers associations in
the closest diamond-trading centers to alert legal dealers of the stolen dia-
mond, they also dispatched people to police checkpoints in the region to
watch out for the thief together with the stationed officers.
212
“We Are the Genuine People”
14
It should be noted, however, that traditional legitimacy is linked to traditional power
structures that inhibit enforcement agents’ ability to enforce the law regardless of their respect
for traditional authority. Powerful economic agents are usually backed by institutional actors in the
capital, which often makes it impossible for local law-enforcement agents to determine and
establish authority.
213
Nina Engwicht
Conclusion
The study of legality and illegality in markets usually works on the assumption
of “consolidated” statehood in which legal and illegal economic practices are
distinguished from each other by a coherent set of laws designed and imple-
mented by legitimate and capable state institutions. In these situations,
illegality is strongly associated with illegitimacy and, if exposed, prosecuted
by the state. If state agents connive at illegal economic activity this can usually
214
“We Are the Genuine People”
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A Crooked Mirror
Vadim Radaev
Introduction
219
Vadim Radaev
and eateries. These activities are not declared to the state, primarily for the
purpose of tax evasion.
We add “counterfeiting” as the third illegal market. Counterfeiting refers to
the production and distribution of goods with unauthorized placing (forgery)
of trademarks as a means of commodity differentiation for the purpose of
consumer deception (Radaev et al. 2008; Rutter and Bryce 2008; Kotelnikova
2011). Counterfeits are rarely produced by households. Most are carried out by
legal or illegal organizations. Infringement of registered trademarks is illegal,
although the sale of counterfeit alcohol may be officially recorded.
We exclude cross-border shopping from consideration here. This type of
imported alcohol is not registered in the country where it is consumed, but the
transactions are legal if they comply with established quotas. Moreover, cross-
border shopping presents a problem in only a small part of the world, primar-
ily in high-income countries such as the European Union (Rehm et al. 2014:
884), whereas in Russia it does not play a significant role.
One more market for illicit alcohol that includes non-beverage alcohol,
such as lotions or liquid glass cleaners, is not registered as part of alcohol
consumption but is legally produced and distributed for purposes other than
drinking (Gil et al. 2009; Solodun et al. 2011). This market was particularly
important in the 1990s. However, because no systematic reliable data are
available on this market, alcohol surrogates are not considered in this study.
Conceptual Background
Illegal markets are heterogeneous (Beckert and Wehinger 2013). Their illegal-
ity derives from various dimensions, including violation of the ban on the
market exchange of certain products (sales of homemade alcohol), non-
compliance with intellectual property rights (production and distribution of
fakes and lookalikes), and tax evasion (non-declared production and sales).
The illegality of organizations, products, and transactions is not necessarily
linked. Organizations can be legal (registered) but involve illegal products
and transactions, whereas legal products can be marketed by illegal (non-
registered) organizations. Transactions can be illegal for various reasons. The
sale of the product is prohibited by law (for example, homemade and coun-
terfeit alcohol); the organization does not have a license to sell alcohol; the
organization does not comply with restrictions imposed on transactions (for
example, selling alcohol to underage customers); and the transaction is unre-
ported by the seller, or the actual market value of the products is concealed.
Products can be legal, illegal (falsified or counterfeit), and legal but misused, as
in the case of non-beverage alcohol not intended for human consumption.
220
A Crooked Mirror
Illegal markets may also produce divergent effects. The quality of homemade
spirits for in-house consumption could be even higher than the quality of
legally manufactured spirits (Rehm et al. 2014), whereas commercial home-
made alcohol produced for the illegal market and aiming to ensure intoxica-
tion might expose consumers to higher risks, be more harmful to health, and
damage the public interest through tax avoidance (Nemtsov 2009). Counter-
feit goods could also be hazardous to health and harm corporate interests by
violating the intellectual property rights of organizations making investments
and conducting research and development (Radaev et al. 2008; Kotelnikova
2011). Illegal manufacturing involves defrauding the state through tax eva-
sion, which is detrimental to the public interest and welfare provision. Above
all, illegal activities are associated with unfair competition, seizing a part of the
market from bona fide actors (Radaev 2005).
First, we need to specify and decompose illegal markets. Second, we should
analyze divergent combinations of these interrelated markets and investigate
how their compositions change over time. We focus on dynamic aspects and
argue that Russian illegal alcohol markets have developed through four main
stages since the 1980s, with substantive shifts in the character of products,
organizations, and transactions and the main factors affecting illegal markets.
These stages are: (i) late socialism and Gorbachev’s anti-alcohol campaign
(1980–91); (ii) liberal reforms and economic collapse (1992–2000); (iii) state
consolidation and economic growth (2001–7); and (iv) economic recession
and new anti-alcohol reforms (2008–today).
Looking at the economic, political, and legislative factors affecting illegal
alcohol markets, such markets tend to grow in periods of exogenous political
or economic stressors, such as anti-alcohol campaigns or economic crises,
whereas in periods of economic stability or growth they tend to shrink or
remain at the same level.
We assume that economic growth and the increase in real disposable
income lead to an increase in legal alcohol consumption and the shrinking
of illegal alcohol markets. A large corpus of literature has established that price
is inversely related to the consumption of legal alcohol (Wagenaar et al. 2009),
although this effect on high-intensity drinking is limited (Byrnes et al. 2013).
The effect of prices on unrecorded alcohol is less clear. However, where home-
made or other unrecorded alcohol was readily available, its consumption was
likely to increase as a result of price increases in the legal market (Haworth and
Simpson 2004). This result derives from a substitution effect, when consumers
respond to higher prices by switching to cheaper beverages (Andrienko and
Nemtzov 2005).
Restrictive policy measures that reduce the availability of legal alcohol may
lead to a reduction of legal alcohol sales and stimulate the use of illegal alcohol
(Andrienko and Nemtsov 2005), although the experience of Scandinavian
221
Vadim Radaev
Data Sources
1
These agencies include the Russian Federal State Statistics Service (Rosstat), the Federal Service
for Alcohol Market Regulation (Rosalkogolregulirovanie), the Russian Federal Service for
Surveillance on Consumer Rights Protection and Human Wellbeing (Rospotrebnadzor), the
222
A Crooked Mirror
Survey data are also used to examine changes in beverage preferences. These
data were collected from the Russian Longitudinal Monitoring Survey, RLMS-
HSE, established by Demoscope and the Carolina Population Center, Univer-
sity of North Carolina at Chapel Hill, and conducted together with the Higher
School of Economics. RLMS-HSE includes a series of annual nationally repre-
sentative panel surveys. The data represent the adult population in all regions
of Russia and all types of residence from 1994 to 2014. Self-reports on the
incidence of the consumption and purchase of alcoholic beverages (including
homemade samogon), the volume of drinking, and beverage preferences are
the main reporting measures.2
For the analysis of homemade and counterfeit alcohol, we use data collected
from the 2014 RLMS-HSE round from 14,968 adults (15+). We are aware that
final consumers have limited capacities to distinguish between legal and
illegal products and transactions, and their knowledge typically depends on
the type of illegal market. Consumers are generally not able to distinguish
between legally or illegally offered alcoholic beverages if the products are
similar, although a much lower price for the same product could indicate to
the consumer the use of illegal goods and transactions.
In some cases (but not all), consumers are able to detect counterfeit prod-
ucts, particularly if they deviate in taste or other quality characteristics, and
indeed, identification frequently follows the consumption of these products.
At the same time, consumers easily recognize homemade alcoholic beverages
when purchasing these products in their localities. Thus, population surveys
may provide relevant data on the use of homemade alcohol, which are absent
from official and business statistics.
The first stage, that of late socialism (1980–91), was characterized by economic
stagnation accompanied by restrictions on the availability of legal alcohol.
Gorbachev’s severe anti-alcohol reform of 1985–7 brought about significant
alcohol price increases, restrictions on alcohol sales, the destruction of vine-
yards and hop plantations, and heavy penalties for alcohol-related offenses.
As a result, the use of legal alcohol was abruptly cut by more than 50 percent.
This collapse was compensated partially by the increase in illegal alcohol
Russian Federal Service for Intellectual Property, Patents and Trademarks (Rospatent), the Federal
Customs Service of Russia, and the Judicial Department under the Supreme Court of Russia.
2
The RLMS-HSE study met the standards for the ethical treatment of participants. It was
approved by the Institutional Review Boards of the University of North Carolina at Chapel Hill,
No. 96-0478, Monitoring the Social Safety Net in Russia, renewal approved June 2, 2014.
223
Vadim Radaev
10
Legal alcohol
9
6
Illegal alcohol
5
3
1st stage 2nd stage
2
83
94
96
80
81
82
84
85
86
87
88
89
90
91
92
93
95
97
98
99
00
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
Figure 12.1. Per capita consumption of legal and illegal alcohol in Russia, 1980–2000
Source: Nemtsov 2009
224
A Crooked Mirror
imported spirits, including pure ethanol and counterfeit and falsified prod-
ucts. Many of these low-quality products were detrimental to human health
(Nemtsov 2002, 2009). The same inflow of imported alcohol of dubious
quality was observed at that time in other Eastern European countries
(Moskalewicz and Simpura 2000). Numerous legally registered and non-
registered firms were involved in a mix of legal, semi-legal, and illegal trans-
actions. A significant part of smuggled and illegally manufactured alcohol was
missing from official statistics.
A large part of cheap and low-quality alcohol was imported using “grey” (tax-
evading) business schemes (Radaev 2005). The process of “grey” imports was
organized in the following way: a retail company had a chain of affiliated firms,
starting with an offshore company that bought goods at market price from a
global vendor abroad. “Independent” import dealers bought the goods from an
offshore company at a drastically reduced price to minimize the amount of
customs duties and VAT paid at the state border. Only a small part of legal duties
was paid officially through customs brokers who received informal kickbacks
for their “grey” services. Then, the merchandise was sold to “one-day” firms
(odnodnevki) registered for one transaction or a few transactions conducted
within three months. These fictitious “one-day” firms resold the goods at a
high price to a wholesale trader and extracted significant revenue. Then, these
firms disappeared before reporting tax. Their illegal revenue was transferred
through a bank providing “grey” services back to the affiliated offshore com-
pany, whereas “cleared” goods were supplied by the wholesale trader to the
retail company at a regular market price (see Figure 12.2).
The production and distribution of counterfeit alcohol flourished in the
second stage, although it is difficult to find reliable systematic data. Legislation
on intellectual property rights in general and the protection of registered
trademarks in particular was undeveloped, although a special federal law
“On Trademarks and Service Marks and Appellations of Origin of Goods”
was adopted in 1992. The enforcement of this legislation was even less effect-
ive given that the courts were largely ignorant of the intellectual property
rights issues. As a result, Rospotrebnadzor of Russia reported that 30–40 per-
cent of alcohol checked during field inspections was of inadequate quality
and/or dangerous for health in the mid-1990s. This was particularly true for
imported alcohol. Most counterfeit alcohol was illegally produced or smug-
gled for legal sale on the domestic market. An increased rate of mortality
attributed to heavy drinking and alcohol poisoning might serve as indirect
evidence of the expansion of illegal alcohol markets (Leon et al. 2009). The
second stage ended with the financial crisis in 1998 when the ruble lost 75
percent of its value. Under these conditions, the import of alcoholic beverages
became less efficient and a resurgence of samogon consumption was observed
for several years (Nemtsov 2009).
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Vadim Radaev
STATE BORDER
One-day firm
"Grey" bank
Illegal revenues
Figure 12.2. Organization of “grey” business schemes with a chain of affiliated firms
The third stage (2001–7) was distinguished by economic growth. Annual GDP
growth rates and real disposable income reached 7 percent and 10 percent,
respectively. Economic growth was accompanied by a decrease in the relative
prices of legal alcoholic beverages. For example, the number of standard
bottles of vodka (0.5 L) that could be bought in retail stores for an average
monthly wage increased by 3.7 times from 51 to 189 units in 1998–2011,
implying that vodka became much more affordable. Toughening state control
over alcohol markets contributed to a decrease in illegal alcohol.
The fourth stage was marked by the financial crisis of 2008–9 and the
economic recession of 2012–14, when the annual GDP growth rate declined
to 1 percent. Average real disposable income growth rates dropped from
10 percent to 3 percent in 2008–13 and became negative in 2014.
Moreover, an active phase of pervasive anti-alcohol reform in Russia started
in 2009, when Rosalkogolregulirovanie was established. A wide range of add-
itional regulations were imposed on the manufacturing and sale of alcoholic
beverages. Restrictions on alcohol availability included bans on off-premises
sales of alcoholic beverages in the evening and at night. Points of sale had to
be located at a safe distance from educational, medical, sports, and cultural
facilities. A ban on alcohol consumption in public settings was added. Step-by-
step limitations and ultimately a total ban on above-the-line advertising of
alcoholic beverages through television, radio, and press were enacted.
New fiscal measures prescribed an accelerated growth of alcohol excise taxes
and minimum unit retail prices on vodka. Alcohol excise taxes increased by 30
226
A Crooked Mirror
3
This part of the study was supported by an unrestricted grant for academic research from the
International Alliance for Responsible Drinking. All conclusions and interpretations offered in the
chapter are those of its author alone and are not necessarily those of IARD or its sponsor
companies.
227
Vadim Radaev
%
80
70
Vodka and
other spirits
60
50
Beer
40
2nd stage 3rd stage 4th stage
30
20 Dry wine,
champagne
Samogon
10
0
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
19
19
19
19
19
19
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
Figure 12.3. Percentage of recorded alcohol and samogon drinkers during the thirty
days preceding the survey in 1994–2013
Note: RLMS data were not collected in 1997 and 1999
Source: RLMS-HSE data
228
A Crooked Mirror
Survey data on counterfeit alcohol from previous years are not available.
However, from a series of in-depth expert interviews we know that the coun-
terfeiting situation improved during the third stage in the 2000s due to serious
changes in state policies regarding the merchandisers of counterfeit goods
(Radaev et al. 2008). Legislation became more effective in 2002, when import-
ant amendments were added to the federal law on trademarks. All special laws
that earlier regulated relations in the field of intellectual property rights were
consolidated in Part 4 of the Civil Code of Russia in 2008 and there was also a
serious tightening of liability for intellectual property rights infringements.4
A legal possibility arose to liquidate infringing merchandising companies or
to suspend the activities of unscrupulous individual entrepreneurs. Equip-
ment, other facilities, and materials used or intended to commit infringe-
ments could be confiscated, and seized counterfeit goods could be destroyed.
More importantly, the enforcement of legislation protecting intellectual
property rights was improved considerably during the third stage of develop-
ment. Previously ignorant of counterfeiting issues, the Federal Customs Ser-
vice became much more responsive to the requests of brand owners (Radaev
et al. 2008). The number of legal cases initiated against infringing companies
increased more than ten times from 2004 to 2006. Approximately 10 million
units of goods on average were seized by customs annually starting in 2007,
with some fluctuations over the years. In the fourth stage, both the number of
opened administrative cases and the amount of seized counterfeit goods
initially decreased during the financial crisis of 2008–9 and then stabilized
(with the exception of the outlier in 2012).
Court practices also changed dramatically in favor of brand owners in the
2000s. The number of arbitration court trials regarding the illegal use of
trademarks increased more than tenfold from 2004 to 2010 and stabilized
during the fourth stage from 2011 to 2013 at a much higher level than
previously.
Criminal liability for dealing with counterfeit products was tightened dur-
ing the third stage of development. The number of market dealers convicted
for the illegal use of trademarks increased eighteen fold from 2004 to 2010,
according to Supreme Court data. Afterwards, the number of criminal sen-
tences decreased from 2011 to 2013, which could be explained by a new
legislative amendment redefining the criteria of serious crimes in the field of
4
In the Criminal Code of Russia (Article 180, Part 1), infringements of intellectual property
rights and the use of trademarks in particular were reclassified to the category of serious crimes,
with a maximum criminal punishment of six years in prison and penalties of up to RUB 500,000
(USD 20,000). In the Code of Administrative Offences of Russia (Article 14.10), the maximum
penalty for an organization was fixed at RUB 40,000 (USD 1,600) with the confiscation of
counterfeit goods. In the Civil Code of Russia (Part 4), the maximum amount of compensation
was increased to RUB 5,000,000 (USD 200,000) or double the price of the goods on which the
trademark was unlawfully placed.
229
Vadim Radaev
the illegal use of trademarks in 2010. The criteria of “large-scale damage” and
“particularly large-scale damage” were raised from RUB 250,000 (USD 8,300)
and RUB 1,000,000 (USD 33,300) to RUB 1,500,000 (USD 50,000) and RUB
6,000,000 (USD 200,000), respectively. Thus, it became much more difficult
for enforcement agencies (the police) to collect sufficient evidence. Nonethe-
less, the number of dealers convicted for the infringement of registered trade-
marks from 2011 to 2013 remained at a level twelve times higher than in 2004.
Brand owners also changed their policies as the Russian consumer market
became increasingly attractive. Companies started to protect their trademarks
more actively through available legal mechanisms. The number of applica-
tions submitted by the companies to Rospatent to register and protect their
trademarks increased more than 150 percent from 2004 to 2013. The number
of trademarks registered in the Customs Register for the Objects of Intellectual
Property increased by 7.5 times from 2004 to 2013, encouraging customs to
stop and check an increasing amount of goods of suspicious origin during
customs clearance.
The more active protection of alcohol brands by the state and brand owners
led to a decrease in the production and distribution of counterfeit alcoholic
beverages. The dynamic of infringement in the quality and chemical compos-
ition of alcoholic beverages may serve as an indirect measure of this change.
Starting with a high level of 30–40 percent in the mid-1990s, the amount of
alcoholic beverages of inadequate quality and/or dangerous for health was
decreasing, with some fluctuations during the third stage, and reached 5
percent or even less by the end of this period. During the fourth stage, starting
in 2008, the amount of revealed low-quality and falsified alcohol containing
dangerous substances stabilized at a historically low level (see Figure 12.4).
230
A Crooked Mirror
40
35
30
25
20
15
10
0
1995–1997 1998–2000 2001–2003 2004–2006 2007–2009 2010–2012
Figure 12.4. Inadequate quality and/or health dangers of vodka and other spirits, wine
(excluding champagne), and beer from 1995 to 2012
Notes: We took six time intervals each comprised of three years to eliminate excessive fluctuations
and make the trends more perceptible
Source: Rosstat Central Statistical Database, <http://www.gks.ru/dbscripts/cbsd/dbinet.cgi#1>
(accessed January 13, 2017)
231
Vadim Radaev
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
19
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
Alcoholic beverages Vodka Ethanol
Figure 12.5. Amount of alcoholic beverages, vodka, and ethanol seized by state pro-
tection agencies during inspections in Russia, 1999–2013
Source: Rosstat Central Statistical Database, <http://www.gks.ru/dbscripts/cbsd/dbinet.cgi#1>
(accessed January 13, 2017)
5
These data were presented by Infoline at a business conference in Moscow in May 2014.
232
A Crooked Mirror
The empirical evidence leads to the following general conclusions. First, illegal
alcohol markets tend to grow in periods of exogenous political or economic
stressors, including the anti-alcohol campaign of 1985–8, the liberal economic
reform of 1992–3, the financial crisis of 1998–9, and the recession of 2012–14.
In periods of relative economic stability and growth, illegal alcohol markets
shrink or remain at the same level.
Second, in some periods, legal and illegal alcohol consumption moved in
opposite directions (1980–92, 1996–7, and 2001–7), whereas in other periods
they moved in parallel (1993–5 and 1998–2000).
Third, at different stages, exogenous political or economic stressors stimu-
lated different types of illegal alcohol market. Regularities in the dynamics of
illegal alcohol markets and the influence of the main factors can be observed
in Table 12.1.
During the first stage of late socialism and Gorbachev’s anti-alcohol cam-
paign (1980–91) homemade alcohol (samogon) prevailed, in particular when
the availability of legal alcohol decreased. Increasing sanctions against samo-
gon producers did not work due to the ineffectiveness of law-enforcement
agencies and public tolerance of illegal products. Markets of counterfeit and
illegally manufactured alcoholic beverages were undeveloped due to the strict
state control over organizations.
In the second stage of liberal reform and economic collapse (1992–2000)
samogon was largely substituted by manufactured alcohol. However, the
market was filled by an increasing amount of cheap domestic and imported
spirits, including illegally produced, smuggled, and falsified products. The
production and distribution of counterfeit alcohol was flourishing. In condi-
tions of a weak state, numerous market sellers used “grey” (tax-evading)
233
Vadim Radaev
Table 12.1. Main stages and factors of the evolution of illegal markets
Main stages
Illegal markets
Homemade alcohol ↗ ! ↘ !
Counterfeit alcohol – ↗ ↘ !
Illegally manufactured – ↗ ↘ ↗
alcohol
Factors
Population real ! ↘ ↗ !
disposable income
Availability of legal ↘ ↗ ↗ ↘
alcohol
Sanctions against ↗ ↘ ↗ ↗
illegal dealers
Effectiveness of ↘ ↘ ↗ ↗
protection agencies
Legalization of market ! ↘ ↗ ↘
sellers
Tolerance of illegal ↗ ↗ ↘ !
products
234
A Crooked Mirror
Along with the evolution of illegal alcohol markets, the character of the
market actors involved was changing in terms of their status and role within
the Russian economy. Homemade alcohol (particularly samogon) was pro-
duced and consumed mainly by households from lower classes and rural areas.
The inflow of counterfeit alcohol came from the numerous small and
medium-sized firms acting as “grey” dealers in the shadow economy. With
the resurgence of illegally manufactured alcohol, which is chemically similar
to original legal alcoholic beverages, large legal enterprises and licensed stores
and horeca companies appeared in the market. Being an integral part of the
legal economy, they mixed legal activity and illegal tax evasion.
235
Vadim Radaev
(i) People may tolerate the production and sale of homemade alcohol,
perceiving it as a survival strategy of the poor and/or as a cultural
tradition even if it is banned by law.
(ii) Customers may be ignorant with regard to counterfeiting given a lack
of competence to distinguish between original and fake products. They
may also tolerate the infringement of intellectual property rights but
not tolerate the falsification of alcohol and other food products if they
are dangerous to health.
(iii) Customers might not distinguish between legally or illegally manufac-
tured alcohol if they buy beverages of the same taste and quality. They
may be ignorant of the falsified tax stamps and tolerate the fraud of the
state by tax-evading organizations. At the same time, people may
expect that illegal products are sold at a lower retail price and perceive
sales at a regular price as an illegitimate deception.
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A Crooked Mirror
Table 12.2. Reasons for the retention of legitimacy of illegal activities in social perception
Ignorance Tolerance
major brand owners, whereas violations of the law were largely ignored by
enforcement agencies due to their inability to identify counterfeit products
(Kotelnikova 2011; Khramova 2012). During the 2000s, however, counterfeit-
ing lost much of its legitimacy. As described in the previous section, more
articulate legislation protecting trademarks was adopted in 2002 and 2008.
Imported counterfeit products were increasingly seized and confiscated by
customs, and arbitration courts increasingly issued verdicts in favor of brand
owners. Simultaneously, brand owners became more active in combating
fakes and lookalikes and in cooperating with state protection agencies (Radaev
et al. 2008, 2010). However, despite positive trends, public opinion remained
ambiguous concerning counterfeiting. Final consumers expressed a low level
of tolerance with regard to the falsification of food products hazardous to their
health, but they perceived deceptions in the area of intellectual property
rights as harmless and even favorable, given that counterfeit goods were sold
at much lower prices. Moreover, although some consumers are deceived by
product originality, others knowingly buy counterfeit goods (Grossman and
Shapiro 1988).
Conclusions
Illegal alcohol markets are diverse and their illegality is based on different
dimensions, including the violation of relevant prohibitions, non-compliance
with intellectual property rights, or tax-evading behavior. Legal and illegal
activities are frequently intertwined. Counterfeit goods can be sold by legally
registered firms through recorded sales. Standardized products with their
original trademarks can be illegally manufactured by legally registered firms
237
Vadim Radaev
that do not declare these products to the state for the purpose of tax evasion.
Legally manufactured goods can be sold through non-licensed trading outlets
by retailers bypassing the law.
The composition of illegal alcohol markets in Russia developed through
four different stages, following political, legislative, and economic changes.
At each stage, some of these markets became dominant, whereas others were
unchanged or demonstrated a downward trend. In the first stage of late
socialism, homemade alcohol was dominant. In the second stage of liberal
reform, it was partially replaced by smuggled and counterfeit alcoholic bever-
ages. In the third stage of state consolidation and economic growth, illegal
alcohol markets shrank. Finally, in the fourth stage, positive trends were
interrupted, and illegally manufactured alcohol became a dominant form of
illegal alcohol market.
Changes in the structure of illegal markets are backed by a continuous
requalification of products, organizations, and transactions when the bound-
aries between legality and illegality are contested and moved. Illegal status can
be gained or lost overnight due to legislative changes, whereas boundaries
between legitimate and illegitimate activities are blurred and slow-moving.
Many illegal activities maintain their legitimacy due to the ignorance or
tolerance of enforcement agencies and final consumers.
The obtained data show that illegal alcohol markets tend to grow in periods of
exogenous political or economic stressors, whereas in periods of relative economic
stability and growth, illegal alcohol markets shrink or remain at the same level.
The size of illegal markets is not very sensitive to the level of legal sanctions
against offenders; it is more affected by the effectiveness of state enforcement
practices. The size of the market is inversely related to the inclinations of
leading market sellers to comply with the law and to protect their property
rights but is positively related to the ignorance and tolerance of final con-
sumers towards illegal products.
More restrictive policies normally reduce legal alcohol sales, whereas illegal
alcohol markets have their own dynamic that requires further investigations.
Like a crooked mirror, illegal markets may provide changeable and erroneous
reflections of legal markets. At some stages, illegal markets may move in
parallel with legal markets, whereas at other stages, they may move in the
opposite direction.
Acknowledgments
This work was supported by the Program for Basic Research of the National Research
University Higher School of Economics.
238
A Crooked Mirror
We thank the participants of a seminar on illegal markets at the Max Planck Institute
for the Study of Societies, members of the Laboratory for Studies in Economic Soci-
ology, and in particular Zoya Kotelnikova, Irina Kratko, and Yana Roshchina for their
valuable comments on the draft of this chapter.
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Khramova, Yekaterina. 2012. “Ambivalence of Consumer Attitudes to Counterfeiting.”
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tribute to Counterfeiting.” In Economy in Changing Society: Consumption, Markets,
Organizations and Social Policies, edited by Maria Nawojczyk, pp. 91–113. Cambridge:
Cambridge Publishing.
Lachenmeier, Dirk W., Benjamin J. Taylor, and Jürgen Rehm. 2011. “Alcohol under the
Radar: Do We Have Policy Options Regarding Unrecorded Alcohol?” International
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241
Part V
Illegal Practices in Legal Markets
13
Introduction
This chapter is concerned with the nature of the supply of doping products
and the relevance of market-based concepts, with specific reference to condi-
tions in Italy. We define doping products as a combination of doping sub-
stances and doping methods. Athletes use doping substances—ranging
from anabolic steroids to stimulants and from erythropoietin to growth
hormones—to enhance their performance or evade detection, a practice
referred to as “doping” and prohibited under sporting rules since the 1960s
(for example, Waddington and Smith 2009).1 Some of these substances are
also used by non-competitive sportspeople for broader lifestyle or psycho-
active purposes, such as growing muscle, reducing fat, or boosting aggressive-
ness, and are also known as performance- and image-enhancing drugs (for
example, Graham et al. 2009). Doping products also include performance-
enhancing methods, such as blood transfusions. The trade and distribution
of doping products is subject to state restrictions and prohibitions, at least in
elite sport, in most European countries, the United States, and elsewhere
(Houlihan and Garcia 2012).
In recent years, a number of high-level international sports officials have
spoken out on the growing presence of the underworld in sport.2 For example,
1
For a formal definition of doping, see WADA 2015.
2
Hoberman (2012: 2–3) reports several quotations.
Letizia Paoli and Victoria A. Greenfield
3
By contrast, the use of doping products has been well researched and reveals a substantial
demand in the Western world. Several studies have attempted to estimate the prevalence of the use
of doping substances among specific types of users, such as elite athletes (Striegel et al. 2010), and at
the national level (Paoli and Donati 2014). McCabe et al. (2007), Kokkevi et al. (2008), and others
have conducted epidemiological studies and Pope et al. (2000), Hoberman (2005), Waddington
and Smith (2009), and others have considered reasons for use.
4
See Beckert and Wehinger (2013) for a discussion of the market concept that we have brought
to this analysis. This and other market concepts do not require “perfect” competition; indeed, a
market can be dominated by a supplier or purchaser.
246
Doping Products and Market-Based Perspectives
In this chapter, we rely on the same sources of data that Paoli and Donati
(2014) analyzed for the completion of their study The Sport Doping Market:
Understanding Supply and Demand, and the Challenges of Their Control, much of
which was collected in close collaboration with the Carabinieri Command for
Health Protection. This unit is still known—and will be referred to here—by
the acronym NAS from its original name, Nuclei Anti-Sofisticazione.
The first source is the “NAS Investigations Database,” which includes sum-
mary data for the eighty major anti-doping investigations conducted by NAS
between 1999 and 2009. These investigations represent the vast majority of
the anti-doping criminal investigations and the related criminal proceedings
initiated in Italy.
The second source is a set of official documents related to forty-six different
criminal investigations, thirty-six of which were carried out by NAS and were
thus included in the NAS Investigation Database and ten of which were
conducted by other police forces and were thus new. In some cases, the
documents were extensive summaries of investigations written by NAS offi-
cers and submitted to the Prosecutor’s Office; in other cases, they were charges
pressed by the prosecutors, arrest warrants issued by the judges for preliminary
investigations, or first-, second-, or third-degree verdicts. We refer to these
cases generically as “investigations” (from NAS’s perspective) or “proceedings”
247
Letizia Paoli and Victoria A. Greenfield
(from a judicial perspective) or with the specific name of the document (for
example, verdict, charges).
The third source is a set of interviews with twenty-six NAS officers, seven
prosecutors, one policymaker, and one other expert on anti-doping testing.5
Paoli and Donati also worked with various other published and unpublished
materials. Among the former, they examined the annual reports of Italy’s
main anti-doping commission (for example, Ministero della Salute and
Istituto Superiore di Sanità 2012) and the seizure statistics of the Italian
customs agency and tax police. Lastly, they conducted an extensive review
of the three main Italian news agencies’—Ansa, Agi, and Adnkronos—doping-
related media reports for the period January 1998 through February 2012.
We note that one challenge facing research on doping-related matters in Italy
is that many activities are alleged but, at least as a matter of process, few
allegations lead to convictions. In a number of cases, for example, we found
that delays in proceedings triggered the statute of limitations, so that charges
were dismissed irrespective of the merits of the evidence, be it direct or circum-
stantial. On that basis, we can paint only a highly suggestive picture of the
involvement of individuals and institutions in the supply of doping products,
but cannot claim to have proven or disproven their involvement. To strengthen
our conclusions, we follow Paoli and Donati (2014) and triangulate findings
from the different sources, including, as noted, an extensive media analysis.
5
Paoli and Donati (2014) refer to these interviews with the following codes: Int-NAS-1 to 26 for
the NAS officers, Int-Proc-1 to 7 for the prosecutors, and Int-Oth-1 and 2 for the two others. We use
the same codes here.
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Doping Products and Market-Based Perspectives
Notes: a in ten other investigations; b in another investigation; c in five other investigations; d in three other investiga-
tions; e in two other investigations; f in one other investigation. If we were to consider team and federation affiliates as a
single “organized sports” category, as we do in the “The Role of National Sports Bodies” section, they would rank ahead
of pharmacists and physicians.
Source: adapted from Paoli and Donati (2014), drawing data from reports in the NAS Investigations Database.
Gym
“Gym” consists of “gym owners or managers and body-building instructors,”
and “owners or managers of dietary supplement shops.” These individuals
usually function as retailers, selling doping products to gym patrons. Some of
these individuals are also wholesalers, selling to retailers, who are often other
gym managers, instructors, or body builders. The manager of a gym in Forlì,
for example, supplied anabolic steroids and other drugs to visitors to his gym
and the managers of at least four other gyms (Tr-FO 2009: 16–19).
On a larger scale, the diary of a former gym owner, the so-called “ ‘big
father’ of national and international trafficking in anabolic steroids”
(NAS Bologna 2000: 233), referenced seven Italian pharmaceutical compan-
ies, two pharmacies, and a private hospital, as likely sources, and revealed
contacts with pharmaceutical companies across Europe and in Latin America
and with numerous international couriers. In the late 1990s, he supplied
two other substantial suppliers and had direct contact with at least twenty-
seven other gyms throughout Italy (NAS Bologna 2000: 243–4 and 267–72).
Concerning the longevity and magnitude of his involvement, he was
arrested in 2011 in Ancona for the illegal import of doping products, valued
at over 1 million euros, which had been manufactured in clandestine labora-
tories in Spain, the Netherlands, and the United Kingdom (Cronache
maceratesi 2011).
249
Letizia Paoli and Victoria A. Greenfield
Category Type
Source: adapted from Paoli and Donati (2014), drawing data from reports in the NAS Investigations Database, criminal
proceedings, and media sources
Health Care
“Health care” consists of pharmacists, physicians, hospital employees, and
employees or sale representatives of pharmaceutical and para-pharmaceutical
companies.
Pharmacists usually function as retailers of doping products, but also occa-
sionally as producers of doping substances (for example, Tr-BO 2004) and
even more rarely as wholesalers (NAS Brescia 2011; Int-Pro-4; Ryan 2011).
They may also be involved in the sale of performance-enhancing drugs with-
out being aware of the purchasers’ illegal intentions. Most frequently, these
“unwitting” pharmacists sell doping drugs on the basis of either false or stolen
prescriptions or prescriptions written by accommodating or corrupt phys-
icians (for example, Tr-RV 2004: 122, Int-NAS-17 and 19).
Several NAS investigations point to the role of physicians in the supply of
doping products, though few criminal proceedings ended with convictions.
Here, we summarize the story of Professor Franceso Conconi, both as a high-
profile example of a physician’s alleged involvement with doping products
and as a means of exploring the chronology (see Figure 13.1) of doping
prohibitions in sports rules and Italian law.6
Legal records and other official documents suggest, but without associated
convictions, that Conconi began providing doping products to Italian elite
athletes, primarily in track and field, cycling, swimming, pentathlon, rowing,
6
Professor Francesco Conconi has been a professor of biochemistry at the University of Ferrara
since 1967 and is the current head of its Centro di Studi Biomedici applicati allo Sport. See his
webpage at <http://docente.unife.it/francesco.conconi/curr>.
250
Doping Products and Market-Based Perspectives
1968: IOC
introduces first 1990: IOC adds 2004: WADA
controls at erythropoietin to list introduces World
Olympic Games of prohibited substances Anti-Doping Code
1967:
International 1999: Following
Olympic 1998 Festina
Committee (IOC) 1976: IOC adds scandal, World 2007: International
publishes first anabolic steroids Anti-doping Convention Against
list of prohibited to list of prohibited 1986: IOC bans Agency (WADA) Doping in Sport
substances substances blood doping is established enters into force
1971: Act 1099 1981: Act 689 1989: Act 401 2000: Act 376
establishes doping depenalizes introduces criminalizes athletes’
as misdemeanor doping crime of use of doping Other applicable offences
“sporting products,
fraud” administration and – Article 445 of Italian Penal
procurement of such Code (CP), “Administration of
1986: Ministry of
products, and all drugs in a dangerous way for
Health bans blood
trade in doping public health”
transfusions for
non-therapeutic products beyond – Article 348 CP, “Illegal exercise
purposes official channels of a profession”
– Drug-trafficking offences, as
revised most recently by
Evolution of Italian anti-doping legislation and related rules Presidential Decree 309 (1990)
and ski sports, with the tacit support of the Italian Olympic Committee
(CONI; Tr-FE 2003; Pr-FE 2000), in the late 1970s.
Such activities would have violated the prohibitions and controls that the
international community had introduced about a decade earlier (Gleaves and
Hunt 2015) and might have violated Italian law. With Act 1099 of 1971,
athletes’ use of doping substances and the administration of such substances
to athletes were criminalized, albeit as a misdemeanor, not a felony. These
offences were depenalized in 1981 and a new specific bill on doping was not
adopted until 2000 (Arioli and Bellini 2005). In the interim, other provisions
of Italy’s penal code and special statutes might have been applicable. Of
particular relevance, we cite “administration of drugs in a dangerous way for
public health” (Article 445 of the Italian Penal Code, hereafter CP) and “sport-
ing fraud,” which was introduced with Act 401 of 1989. Over time, the latter
has been used to prosecute crimes related to doping, albeit in a partially
controversial manner (see Paoli and Donati 2014: 153–4).
Conconi eventually faced charges in a trial conducted in 2002–3 and was
named in a related proceeding in 2000, but neither event resulted in a con-
viction. In the trial, Conconi was charged with sporting fraud (Tr-FE 2003)
and, in the proceeding, Conconi and three high-ranking CONI officials were
charged with criminal association for the purpose of distributing drugs in a
manner dangerous to public health (article 445 CP) (Pr-FE 2000). In both
251
Letizia Paoli and Victoria A. Greenfield
252
Doping Products and Market-Based Perspectives
Horseracing
“Horseracing” includes breeders, veterinarians, and drivers. We combine these
three types of suppliers because the NAS Investigations Database and other
sources do not provide specific information on each. Several investigations,
both in southern and northern Italy, have shown that numerous veterinary
physicians, breeders, jockeys, and drivers exchanged doping products and
253
Letizia Paoli and Victoria A. Greenfield
(Semi-)Professional Sportspeople
“(Semi-)professional sportspeople” consists of elite athletes and hard-core
body builders, including law-enforcement, military, and private security com-
pany staff, and, in some instances, their family members. NAS investigations,
other criminal proceedings, and media reports indicate that some elite ath-
letes and hard-core body builders do not just use doping products to improve
their own performance but they or their closest family members also engage in
the import and distribution of doping substances. Some of these individuals
purchase doping products for their own consumption, but then sell additional
amounts, to finance their consumption or supplement their incomes.
Given frequent trips abroad, elite athletes may be ideally positioned to
import doping substances, especially from countries, regions, or localities
with less-restrictive regulations or relatively lax enforcement. Exploiting
differences in national, regional, or local regulations and enforcement, they
also may be able to buy doping products legally or without detection or risk
of penalty.
After classifying the suppliers of doping products, we identify the sources and
distribution levels of the different doping products, distinguishing between
doping substances and methods and among different doping substances. This
exercise allows us to assess whether a “market” exists for either doping sub-
stances or methods.
254
Doping Products and Market-Based Perspectives
Doping Substances
The existence of multiple and competing distribution chains, connecting
producers and end users, is highly suggestive of market-like activity, even if
money does not change hands in every final transaction (for example, when
team employees are suppliers).
The distribution chains differ by length, depending on the substances and
quantities traded and the degree of entrepreneurship of the end users, and by
legal status, depending partly on some of the same factors (see Figure 13.2).
The legal status of the particular exchanges and transactions along a distri-
bution chain might also vary by context. Some substances, especially steroids,
are produced exclusively for doping purposes in pharmacies or in illegal
laboratories, in Italy or abroad. A large but imprecisely known share of the
doping substances sold in Italy appears to have been produced by legitimate
drug manufacturers located in Italy or abroad and to have been diverted at
some stage from the legal distribution chain. As Italian anti-doping investiga-
tions indicate, the diversion can take place at different levels of the dis-
tribution chain. Employees or managers of the Italian or foreign drug
manufacturers or their distributors may decide to divert some of the legal
production to the illegal market. Drugs might also be stolen from the storehouses
or trucks of drug distributors or from hospitals or, more rarely, pharmacies by
staff members or unaffiliated thieves in Italy and abroad. Italian and foreign
pharmacists also might sell doping products intentionally, but still be
unaware of the non-therapeutic purposes for which some of their customers
buy and then sell the products, either on the basis of a prescription written by
a corrupt physician or of a false or stolen prescription. In some non-Italian
countries, pharmacists may be allowed, under domestic laws, to sell doping
products, the sale and use of which are restricted in Italy.
Given the variety of doping products available in the market and the fact
that, within each class of products several products can be functionally
equivalent, users can engage with a variety of retailers, each representing the
final link of an alternative distribution chain characterized by different com-
binations of legal statuses. Moreover, the availability of doping products has
increased tremendously with the spread of websites selling steroids and other
pharmaceuticals in an unregulated space. Internet sales have made it possible
for users in Italy—and elsewhere—to bypass domestic distribution chains by
ordering doping products online and having them delivered by mail at home.
Unlike illegal drug traffickers or dealers, the majority of the suppliers of
doping products can hide their illegal transactions and their relationships
with their “doping partners”—their own suppliers, collaborators, and
customers or patients—behind the legitimate roles they play in their busi-
nesses, organizations, or professions. The embeddedness of doping-related
255
Letizia Paoli and Victoria A. Greenfield
Methods
1. Physician or
Users
other
€
Producer of Intermediate
2a. Distributor(s) Pharmacist User
raw materials supplier(s)
€
Producer of Intermediate
2b. Distributor(s) Illegal lab User
raw materials supplier(s)
Figure 13.2. Illustrative distribution chains for doping products and methods
256
Doping Products and Market-Based Perspectives
The evidence does not suggest a major role for organized crime, as most
typically construed, in the supply of doping products in Italy. The analysis of
the criminal proceedings and the expert interviews indicate a very limited
involvement of southern Italian mafia groups in the production and distribu-
tion of doping products in Italy. Thus far in this analysis, we can trace only one
specific type of supplier back to southern Italian mafia-type organized crime
groups: the hijackers who steal doping substances from trucks and are often
associated with Neapolitan Camorra groups. Members of some Camorra groups
also play an important role in fixing horse races, which can be achieved by
doping horses (Int-NAS-26 and Marino 2001). These practices lend narrow
support to WADA’s assessment that the same underworld people who trade in
doping substances also undermine the integrity of sport through illegal betting.
The evidence on violence and fraud in the supply of doping products
suggests little of the former and an abundance of the latter. Reflecting the
white-collar background of many or most suppliers, the suppliers of doping
products in Italy, other than truck hijackers, are rarely reported to use physical
violence. In contrast, fraud by means of counterfeiting appears to occur often,
particularly in the non-elite segment of the market (Di Giorgio 2011), but we
have no data with which to estimate the relative shares of counterfeited drugs,
on the one hand, and diverted or stolen drugs, on the other.
The evidence on corruption is mixed, depending partly on how one defines
corruption. We found almost no evidence of bribery but found ample evi-
dence of “abuse of public or private office,” albeit not necessarily “for personal
gain” (OECD 2008: 22). Particularly in elite sports, different types of
suppliers—for example, physicians, pharmacists, coaches, and sports feder-
ation officials—appear to abuse their positions and the athletes’ and the
latter’s parents’ trust by prescribing, selling, or administering the athletes’
doping products and convincing them of the necessity and harmlessness of
doping products (see also the next section). However, these abuses typically
do not occur “for personal gain”—or at least not fully so—but in the name of a
misconceived public or team good.
Doping Methods
We found little or no evidence of a market for doping methods. Doping
methods are administered on an ad hoc basis to elite athletes by a limited
number of physicians and private clinics using legitimate and often banal
medical instruments. Whereas there is a legitimate market for such instru-
ments entailing multiple and competing distribution chains, there are no
regular exchanges for doping methods. However, final users can, to a large
extent, functionally substitute the most frequent doping method—blood
transfusion—with doping substances, specifically erythropoietin.
257
Letizia Paoli and Victoria A. Greenfield
A Quasi-Illegal Market
7
See the related discussion in the section “A Typology of the Suppliers of Doping Products” in
this chapter.
258
Doping Products and Market-Based Perspectives
their supply—are legal and in others they are not. In that way they are more
like other diverted or stolen pharmaceutical products, and less like cocaine or
heroin. By and large, society treats the latter as inherently illegal: most coun-
tries prohibit the trafficking and possession of cocaine and heroin for non-
personal use because, with few exceptions, these drugs have been deemed
dangerous to public health and lacking therapeutic value. Instead, most dop-
ing products are also legitimate, well-established pharmaceutical products.
Moreover, the legal status of many supply-side doping-related activities
varies along the distribution chain and by location.
A drug may begin its “life” as a legal product at one end of the supply chain
and conclude its “life” as an illegal product at the other (see Figure 13.2). Many
drugs that are used illegally as doping products are produced by legitimate
pharmaceutical companies that might not meet the regulatory requirements
of developed Western countries but can operate lawfully in their own
countries.
Given the lack of harmonization of the relevant criminal law legislation
within the EU let alone across more disparate borders, the same supply activ-
ities can or are likely to have different legal statuses in different countries.
Body builders in Germany can legally obtain anabolic steroids through regular
physicians and pharmacies (Striegel et al. 2006), whereas physicians and phar-
macists cannot legally prescribe or sell the same drugs to body builders in Italy.
In a comparative perspective it is also necessary to ascertain the effective
degree of enforcement of the existing regulations and prohibitions.8 Numer-
ous observers (for example, Hoberman 2011: 100) complain that the existing
sports rules and criminal law provisions have not always been implemented
effectively.
Even within the same country, some doping products, with very restricted
therapeutic uses, may be “more” illegal—at least from the point of view of
criminal justice rather than sports authorities—than others. Nandrolone is a
good case in point. In 2010, the Italian Ministry of Health added nandrolone,
an anabolic steroid, to the list of psychoactive substances to be controlled
under Italian drug law (DPR 309/1990 and later amendments), sharply redu-
cing the possibility of legal transactions and allowing a whole range of special
investigation methods (for example, controlled delivery) that Italy’s anti-
doping act does not allow (Ministero della Salute 2010).
Under Italian law, many actors frequently involved in the supply of doping
products—such as physicians or pharmacists—may or may not commit a
crime depending on the therapeutic needs of their customers and clients.
The legality or illegality of their decisions and actions depends partly
8
For the concept of “effective illegality,” see Paoli et al. (2009).
259
Letizia Paoli and Victoria A. Greenfield
260
Doping Products and Market-Based Perspectives
Concluding Remarks
Framing the doping market as “quasi-illegal” might shift the discourse on anti-
doping policy (Lowther 2015) or suggest new avenues for controls, but the
market is not entirely unique in covering the spectrum of legality and illegality
with some amount of ambiguity. This market has its own peculiarities, includ-
ing a history of high-level government involvement, and might be more
ambiguous than others, but many other markets could be—and sometimes
have been—described as “quasi-illegal.” They, too, involve goods and services
that are not fully prohibited but can, under some conditions, be sold, bought,
and used legally. Consider, for example, the differences between the “white,”
“grey,” and “black”9 components of the markets for cigarettes, weapons,
gambling, and, most notably in the context of doping, painkillers and medical
cannabis.
Notwithstanding the temptation to look to the well-explored heroin and
cocaine markets for policy insight, they, as wholly criminal markets, might
present weak analogies for a study of the supply of doping products. Thus,
anti-doping policymakers and researchers might need to find different analo-
gies, including those pertaining to other quasi-illegal markets and, possibly, to
white-collar crime, to draw out the implications of variations in legality for
anti-doping policy.
Our findings on the quasi-illegality of the doping market in Italy could also
have broader implications for research in criminology and, perhaps, other
disciplines, such as sociology. Over the decades, criminologists10 have tended
to use the word “crime” loosely, disregarding the distinction between “crim-
inality” and “illegality.” This disregard is particularly evident in the literature
on organized crime and illegal markets. In the early 1970s, when US crimin-
ologists revolted against the ethnically loaded and highly formalized official
understanding of organized crime, they proposed the concept of “illegal
enterprise” (Haller 1990) as an alternative. Although originally meant to replace
“organized crime,” the phrase “illegal enterprise” has with time become a
synonym for organized crime (van Duyne 1997), thus further conflating the
9
The terms “white,” “grey,” and “black” are not subject to strict definitions (see OECD 2002
and Feige 1990 on ambiguities), but for our purpose, which is to draw attention to the gradations of
legal status across fora, we follow the commercial literature (for example, Restani 1987) and make
the following distinctions: “white” markets are wholly legal; “grey” markets violate terms of
distribution, but neither the channels nor products are illegal, per se, as in the case of branded
electronic or cosmetic products that are distributed through channels which, while legal, are
unofficial, unauthorized, or unintended by the original manufacturer; and “black” markets
involve illegal trade, but not necessarily illegal products. Others (for example, Karp 1994: 178)
are less specific.
10
Including the authors of this chapter.
261
Letizia Paoli and Victoria A. Greenfield
differences between criminality and illegality (see Paoli and Vander Beken 2014,
for an overview).
Because of the conflation of criminality and illegality and the focus on heroin
and cocaine in empirical research, criminologists and, to a lesser extent, other
social scientists have not yet fully explored the nuances and implications of
legal status. Nor have they appreciated that players and products can shift
across market segments that are characterized by different legal statuses, or
can violate different criminal and non-criminal legislation simultaneously
and as a result of those shifts. Even in studies of illegal rather than fully criminal
markets—such as those for cigarettes (von Lampe 2011), weapons (Feinstein
and Holden 2014), and gambling (Spapens 2014)—criminologists have often
treated these markets as a separate “criminal” appendix to a larger legal market.
Economists have been more active in this arena, both in the conduct of case
studies and the development of formal models, and some publications across
disciplines have attempted to typify markets with illegal characteristics (for
example, Reuter 1985; Castells and Portes 1989; Feige 1989; Naylor 2003;
Beckert and Wehinger 2013). However, the foregoing assessment of the Italian
doping market suggests that, to varying degrees, products, transactions, and
suppliers and consumers might defy easy classifications in quasi-illegal mar-
kets and thus require careful handling under any research paradigm. At least
some market players might be willing and able to get in and out of the
different legal, illegal, variable, and disputable market segments, possibly
adjusting their modus operandi and profit expectations as they move among
them. Criminologists—and other social scientists—are called not only to
weave together the literatures of their different disciplines but also to system-
atically investigate market players’ shifts and adjustments to form a more
complete picture of the implications of the shades of legal status.
Acknowledgments
This work was supported by the World Anti-Doping Agency pursuant to a 2010 Research
Funding Agreement for the project “The Trafficking of Doping Projects and the Chal-
lenges of Supply Reduction: An Examination of Italy’s Experience.”
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14
Illegal Prices
Boris Samuel
Between 2005 and 2010, Mauritania and Guadeloupe both faced massive
social mobilizations against the high cost of living. Political discontent was
directed against the fact that some leading economic actors were accumulat-
ing profits considered illegitimate and excessive, while appearing to be respon-
sible for the high prices of some of the most important consumer goods, such
as imported food and energy. The widespread use of illegal practices, breach-
ing commercial, fiscal, or public finance laws, was blamed for the unjust
pricing. At the same time, the state’s responses to high living costs and
illegality had met with limited success, both because market transactions
could scarcely be controlled and because the state was going easy on powerful
economic actors, who were or might become allies. The public debate about
price formation in Guadeloupe and Mauritania thus became a tense socio-
political conflict over inequality and its administration. This chapter will seek
to shed light on this situation in order to portray the interfaces between
legality and illegality in markets in specific historical situations, and to ques-
tion their role in shaping social and political relations. How did legality and
illegality intertwine in the formation of basic commodity prices in Mauritania
and Guadeloupe? To what extent did the existence of illegality in markets
contribute to the establishment of legitimate social and political orders?
To answer these questions, I will focus on a specific object, the two states’
interventions against high prices, which I will explore in two directions. First,
looking at the 2009 social mobilization against high living costs in Guade-
loupe, I will describe how a wave of audits responded to the social demands for
Illegal Prices
transparency and the unveiling of illegal practices. Auditing practices and the
debates they generate are a fruitful entry point to analyze the way market
practices are labeled illegal, and the institutional and sociopolitical processes
by which their denunciation occurs. Their analysis also helps in identifying
the conditions in which the presence of illegal practices may lead to sanctions
or, on the contrary, be tolerated. My observations suggest that in Guadeloupe
illegalities remained largely unsanctioned, enabling the continued coexist-
ence of legality and illegality in price formation.
Second, dealing with Mauritania, I will focus on so-called “emergency
plans” aimed at giving the population wide access to low-price commodities
all over the country in case of severe price hikes. Studying these plans is useful
for questioning the ambivalent relationships the state apparatus has main-
tained with illegal transactions in markets. In Mauritania, public interven-
tions were necessary to contain the dramatic social and political consequences
of price hikes. But circumvention of the rules was also so common in the
public administration, as well as collusion and straddling positions of power
and positions of accumulation (Bayart 2009), that illegal market transactions
and wide use of fraudulent practices characterized the implementation of
such social programs, too. They even became one of the means by which
the government organized redistribution in ways that would also ensure gains
for a number of powerful actors.
Examining these cases will thus give me the opportunity to examine the
multifaceted and sometimes contradictory relationships between public
administration and state regulation and illegality in markets. In Guadeloupe
illicit activities are so pervasive and linked to the activities of powerful actors
that they remain unsanctioned even when they are under the scrutiny of
transparency programs. In Mauritania, the pervasive presence of illicit activ-
ities, while generating protests, may also ensure redistribution, and consoli-
date state authority and legitimacy. Both illustrate a certain type of
“legitimate illegality” and show that, while trying to regulate or limit illegal-
ity, a state’s actions may also rely on it. Unlike some of the usual interpret-
ations of the roles of illegality in so-called “developing countries,” which
consider that circumvention of legal rules and corruption are so pervasive
that the formal state is of no significance in social life (Chabal and Daloz
1999; Mkandawire 2013; Reno 1995), the empirical cases presented in this
chapter will show that illegality may contribute to the formation of states, in
line with the argument put forward by Bayart et al. (1999). The Mauritanian
case will even suggest that illegality may become instrumental for the regime
in building political support. The main theoretical contribution of this
chapter will thus be to show that the state may govern the economy by
selectively enforcing laws and regulations: in both empirical cases, the regu-
lation of food and oil markets offers opportunities to favor a range of
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270
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271
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1
A full description of the negotiations described in this paragraph is provided in Samuel
(2013).
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were violating competition law, but the resistance of these powerful actors
forced the state to step back.
The legitimacy of state power was thus contested through condemnation of
the opacity of state-administered oil prices. A range of actors (including
unions, state services, or corporations) had conducted audits and inquiries
to challenge the legitimacy of prices and unveil abuses, illustrating what has
recently been called “statactivist” uses of quantification (Bruno et al. 2014).
But illegalities could only be partly contained. The diversity of economic
interests and the power relations involved in oil price setting have made it
impossible to eliminate the sources of illegitimate profits and reach consensus.
2
Interviews with INSEE officials, Guadeloupe, October 2010, and France, November 2012.
3
On the links between historical imagination and price formation see Berry 2007, Boltanski
and Esquerre 2015, Bonnecase 2013.
4
Since the 1970s, to avoid an economic collapse and compensate the decline of the agricultural
sector, the state has saved many settler families from bankruptcy by distributing large and often
poorly targeted public subsidies. The 2009 conflict expressed the resentment such a situation had
provoked: the Bernard Hayot Group and the Huygues Despointes Group, which are examples of
such groups, were particularly targeted during the social movement.
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state to undermine the social gains of the overseas departments, where, since
1953, civil servants have received special bonuses (known as sur-rémunérations
which reach 40 percent in Guadeloupe), officially justified by the price differ-
ences with mainland France (Samuel 2013; Pied 2010).5
The LKP was thus targeting a controversial issue by putting transparency
and price analysis at the center of its broad platform of protest.6 As in the oil
sector, the social conflict provoked a wave of audits and economic analyses.
The report of the Competition Authority “dealing with import and distribu-
tion mechanisms of large consumption goods in the overseas departments”
(Autorité de la concurrence 2009b) drew up an impressive list of violations of
competition law. It showed, for example, that the small size of the market
favored the establishment of highly dominant positions for very few players,
who used illegal means to curb competition. Importers and distributors were
integrating vertically to exclude competing products and brands from the
market and to impose higher price levels. Exclusive contracts were signed
between mainland brands and importers in order to eliminate competitors
and make it impossible for independent newcomers to enter the retail sector.
Some more invisible barriers were also protecting dominant players: land
access, for example, is very limited on the island, allowing the old landowner
families to control the development of the new commercial sites. It was clear
to the Competition Authority that the huge price differences with the main-
land could only be explained by the existence of these abuses. Among a
sample of seventy-five products the Competition Authority examined, the
price differences compared with mainland France were above 55 percent for
more than half the sample. This was well beyond the plausible impact of the
additional costs due to the remoteness and small size of the market.
For the trade unions and the LKP, the publication of this report was a major
victory. In their view, it confirmed that the former “colonial forces” were still
extracting profit from the population by illegal means (UGTG 2009). Never-
theless, almost no sanctions followed: sanctions would have required a major
administrative effort to gather proof of misconduct (Doligé 2009). This can be
interpreted in various ways. First, as Jens Beckert argued (2009), competition
generates conflicts of interest between economic actors which can threaten
the “social order of markets.” In the Guadeloupian situation, however,
unsanctioned illegal practices were able to develop under the eyes of the
regulator, and these illicit practices, even if largely disapproved of and con-
tested, could not be seriously threatened. Such a situation confirms that the
regulation of competition not only mediates struggles in markets, but also
5
In 1997, the publication of a price comparison had triggered a “revolt of civil servants” on the
island of Réunion (Conan 1997) for these very reasons.
6
For a description of the platform of protest, see Samuel (2013: 259–69).
274
Illegal Prices
makes complicity possible (Le Roy 2004). The existence of collusion and fraud
at the heart of a market should not be a surprise: patrimonial and legal forms
of domination are easily enmeshed in concrete historical situations, which are
always of a hybrid form between ideal types (Weber 1978; Hibou 2015).
Second, the limits between legality and illegality remain blurred (see Mayntz,
in this volume). For many local actors, given the small size and peripheral
character of the market, competition law is even considered to be non-
applicable in Guadeloupe.7 While this could have merely given discretionary
(or even arbitrary) power to administrative institutions—the boundaries
between tolerated and non-tolerated illegality being subject to a lot of sub-
jective assessment on the part of administrators—the actual mechanisms of
price formation indicate that the blurred boundaries between legality and
illegality favored the perpetuation of existing hierarchies and power relations
(Beckert 2011; Bourdieu 2005). The existence of unsanctioned illegalities can
be interpreted even as a continuation of the long-term inequalities of coloni-
alism, as argued by the LKP. In a Braudelian interpretation, illegality in mar-
kets appears as a contemporaneous means of capitalist appropriation, used by
the dominant actors (Braudel 1985; Wallerstein 1983).
7
Interviews with heads of businesses and state officials, Guadeloupe, August–November 2010.
275
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276
Illegal Prices
Turning to the Mauritanian case, I will both show the value of a comparative
perspective in studying the politics of illegality in price formation and shed
light on additional ways in which illegality in prices can shape social and
political relations. In Mauritania in the 2000s, high prices were also the
starting point of a radical political critique; the fight against high costs of
living stood at the center of a political controversy. Since the international
food price hikes in 2007, popular protests accused the political regime of not
fighting against inflation and of complicity with the dominant importers
who were seen as responsible for inflation. But in the Mauritanian situation,
illegality was not only impossible to eliminate, or just tolerated, as in Guadeloupe:
it had clearly become a tool of governance. The state maintained collusive
relationships with the main businesses and certain social groups through
its unorthodox and illicit regulation of markets. Those relationships were
instrumental in enabling the regime to generate political support and hold
together a constellation of various interests to secure its power. As in Bayart
et al.’s (1999) account of the “criminalization of the state in Africa,” criminal
and illicit activities contributed to the formation of state power.
8
The central bank’s currency reserves were not the equivalent of twelve months of imports, as
officially declared, but only two weeks, as later audits revealed (Islamic Republic of Mauritania
2006). For a description of the Mauritanian macroeconomic fiction and its links with international
organizations such as the International Monetary Fund, see Samuel 2015.
277
Boris Samuel
provoked strong inflation. In 2010 also, after a new coup d’état in August
2008, international markets were once again the cause of high inflation.9
Facing the social and political tensions caused by inflation, the various
governments’ first reaction was to resort to repression. In 2004, for example,
small, informal currency resellers were imprisoned (Horizons 2004; Samuel
2013). This may seem paradoxical, because these vendors were only inter-
mediaries earning small commissions and had no influence on the market and
the deterioration of the currency. But since the speculations of Mauritanian
banks, linked to powerful tribal groups, were not controllable by the state, the
Mauritanian government had invented an enemy, the small resellers. At the
end of 2007, repression was directed against demonstrators: the massive social
unrest of December, which denounced the multiple unjust price hikes and led
to police shootings and the killing of a demonstrator. And after General
Mohamed Abdel Aziz took power in August 2008, the regime began to accuse
business people prominent under the previous regime of mismanagement and
fraud in relation to the food emergency plans: inflation and accusations of
illegal practices on markets became an excuse for the regime to imprison some
of its fiercest rivals.10 Each time tensions have arisen about inflation in Mauri-
tania during the past ten years, the government has reacted by repression and
shows of authority. Although they were incapable of stopping inflation,11 the
government established various target groups and used the presence of illegal-
ity in markets as a justification to enable the promotion of disciplinary (and
sometimes violent) policies, thereby consolidating their power.12
9
A description of the inflation path in Mauritania can be found in Samuel (2013: 537–76).
10
For example the so-called “rotten rice” affair (Quotidien de Nouakchott 2011).
11
This can be compared to the way the French colonial power had engaged in repression against
traveling merchants in Central Africa many decades earlier, as described by Janet Roitman (2004).
This did not help to reduce inflation, but French administrators used price-related “disorders” as
an argument to legitimize the establishment of a colonial political order.
12
For other illustrations of this link between order and prices, see Dumez and Jeunemaître
(1989), Roitman (2004), and Stanziani (2007). I also studied it in the Guadeloupian case; see
Samuel (2014).
13
Emergency plans were implemented in 2004, 2007/2008, 2009, and 2011.
278
Illegal Prices
First, because they were one of the government’s most salient priorities,
such “emergency plans” accounted for a substantial share of government
spending. In 2008, for example, the plan accounted for nearly 200 million
dollars, the equivalent of 30 percent of the annual budget (ISFP 2010). But the
government financed these plans via exceptional public finance procedures,
often extra-budgetary (IMF 2008; Targui 2010), arguing that price movements
were unpredictable, and thus required emergency procedures that were
incompatible with the rigid regular budget framework.14 Hence, these policies
led to the informal and illegal use of public funds and favored massive cor-
ruption (Samuel 2013: 579–95; Calame 2008).
Second, they encouraged state-sponsored illegal transactions on the food
markets. The main instrument used to contain price hikes and give access to
food commodities were the so-called “solidarity stores” (boutiques solidarité).
These shops, present all over the country, sold subsidized basic food products
(such as rice, flour, cooking oil, and sugar). But the distribution mechanism
was only moderately successful. It provoked endless queues15 and the subsid-
ized products were said to be of poor quality.16 Above all, the “solidarity
stores” provided myriad opportunities for small-scale trafficking for many
actors, ranging from shop owners to local “big men” or state representatives.
The owners could easily sell the subsidized products at normal prices, thereby
increasing their margins; they could sell large quantities to people who were
not entitled to them, such as local notables, in order to obtain favors in return;
they could also keep the wares for their own families and get access to more of
the subsidized products. The selection of shops was also an opportunity for
clientelistic games: the advantages were numerous for the selected shops
because their owners were granted a comfortable monthly income (80,000
ouguyia, the equivalent of the salary of a state executive). A whole bureau-
cratic apparatus also had to be established, hiring many well-paid unemployed
young people to, supposedly, control the stores and the implementation of
the program. These jobs, as well as all the procedures which were used to
institute and run this market, were opportunities for the exertion of influence,
clientelism, and fraudulent practices. The “emergency plans” thus enabled the
state to build a nation-wide commercial and sociopolitical network of sup-
porters. They put fraud and injustice at the heart of what was supposed to be
social policy.
The state benefited from the extension of illegal practices in the markets for
the most consumed food items. Illegality was instrumental for the government,
14
Interviews with officials, Nouakchott, November–December 2011.
15
The products were distributed according to predefined rules: each household was entitled to a
limited daily quantity, and the products were sold according to a well-defined daily schedule.
16
Interviews on these issues were held with state officials, shop owners, citizens, party
representatives, and international actors in Nouakchott in November–December 2011.
279
Boris Samuel
280
Illegal Prices
Conclusion
The first main conclusion that can be drawn from the preceding analysis is
related to the interpretation of the roles of illegality in so-called developing
countries, and particularly in Africa. For the neo-patrimonialist school, cor-
rupt interests drive economic and social life, as well as the action of public
17
On the rhetorical power of economic language, see Gudeman (2009).
18
This argument has to be taken seriously. For example, my interviews showed that the
relationships between the state and importers were in favor of the latter. Because of the state’s
urgent need to distribute large quantities of food, the importers have the ultimate power to fix the
prices and determine payment conditions.
281
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282
Illegal Prices
References
283
Boris Samuel
Bourdieu, Pierre. 2005. The Social Structures of the Economy. Cambridge: Polity.
Calame. 2008. “Brèves de la Semaine du Calame: PSI hors la loi . . . ” July 10.
de Certeau, Michel. 2011. The Practice of Everyday Life. London: University of California
Press.
Chabal, Patrick, and Jean-Pascal Daloz. 1999. Africa Works: Disorder as Political Instru-
ment. Bloomington: Indiana University Press.
Conan, Eric. 1997. “Réunion: Les dessous du volcan.” L’Express, August 7.
Doligé, Eric. 2009. Rapport d’information au nom de la mission commune d’information sur
la situation des départements d’outre-mer. Paris: Editions du Sénat.
Dumez, Hervé, and Alain Jeunemaitre. 1989. Diriger l’économie: L’État et les prix en
France, 1936–1986. Paris: L’Harmattan.
France Antilles Guadeloupe. 2006. “Les pêcheurs exigent de la transparence.” August 18.
Gudeman, Stephen (ed.). 2009. Economic Persuasions. New York: Berghahn Books.
Hart, Keith. 1986. “Heads or Tails? Two Sides of the Coin.” Man 21–3: pp. 637–56.
Hibou, Béatrice. 2011. Anatomie politique de la domination. Paris: La Découverte.
Hibou, Béatrice. 2015. The Bureaucratization of the World in the Neoliberal Era. Basing-
stoke: Palgrave Macmillan.
Horizons. 2004. “La spéculation des devises, une opération de sabordage de notre
économie nationale.” Nouakchott, 3739, June 9.
IMF. 2008. Mauritania: 2008 Article IV Consultation and Third Review under the Three-Year
Arrangement under the Poverty Reduction and Growth Facility. Washington, DC, May 5.
ISFP, Initiative sur la flambée des prix agricoles. 2010. Mission de consultation avec le
gouvernement et les partenaires au développement et identification préliminaire d’un plan
d’actions—Aide-mémoire, June.
Islamic Republic of Mauritania. 2006. Rapport sur la révision des données macroéconomi-
ques 1992–2004. Nouakchott, June.
Le Roy, Frederic. 2004. “La concurrence: Entre affrontement et connivance.” Revue
française de gestion 158: 149–52.
Mkandawire, Thandika. 2013. “Neopatrimonialism and the Political Economy of Eco-
nomic Performance in Africa: Critical Reflections.” Working paper, Institute for
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XXIe siècles).” Politix 81: pp. 181–202.
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Payen, Didier. 2009. Rapport sur les prix des produits pétroliers en Guadeloupe: Version
définitive du 10/01/2009. Observatoire des prix de la région Guadeloupe/Conseil
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Pied, Henri. 2010. “Martinique méconnue . . . la grève de 1953.” Antilla, September 2–9.
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285
15
Robert Tillman
Introduction
1
This chapter draws on the arguments and materials presented in Robert Tillman et al.
forthcoming.
The Price Is Not Right
and to take a closer look at the connections between white-collar crime, the
economy, and financial institutions. The scope and scale of these fraud epi-
demics has led a number of researchers to conclude that they were symptom-
atic of larger shifts in the economy and in society. Analyzing the broader
context of the savings and loan crisis of the 1980s, Calavita and Pontell
(1991), for example, noted that previous studies of white-collar crime had
focused on manufacturing enterprises that characterized industrial capitalism,
whereas advanced economies such as the US economy are increasingly dom-
inated by financial transactions. Therefore, they argued, “it seems likely that
the qualitatively different ‘production process’ in finance capitalism will gen-
erate new forms of corporate crime in response to new sets of organizational
pressures.” Similarly, in their study of fraud in the small business health-
insurance industry, Tillman and Indergaard (1999) argued that by the late
twentieth century the economic terrain had been fundamentally restructured
by corporations that had abandoned certain markets “where they once sup-
plied products or services,” such as health insurance, creating opportunities
for new forms of white-collar crime. In a later study of corporate fraud, the
same authors demonstrated that so-called “New Economy” firms, typified by
companies such as Enron, took advantage of broader economic trends—
including deregulation, a shift to network organization, and a shift among
reputational intermediaries like lawyers and accountants to take on advocacy
roles for their clients—to engage in a wide variety of fraudulent activities, the
most common of which was financial statement fraud, in which investors
were deceived about the true state of affairs at publicly held corporations
(Tillman and Indergaard 2005).
The other aspect of these newer forms of financial crimes that has forced a
reappraisal of their significance has been their costs, which in some cases are
truly staggering. The savings and loan debacle, in which over 1,000 thrifts
(building societies in the United Kingdom) had to be bailed out by the US
government, eventually cost taxpayers over USD 125 billion. A recent analysis
by three prominent economists put the costs of corporate securities fraud
alone at USD 380 billion a year (Dyck et al. 2013). Economist Gabriel Zucman
has estimated that 8 percent of the world’s wealth—about USD 7.6 trillion—is
held in secretive tax havens, beyond the reach of tax collectors and unusable
for the public good (Zucman 2015). The costs of financial crime and its related
economic dislocations are not only monetary but physical as well. A study
published in British medical journal the Lancet, for example, estimated that
the global financial crisis that began in 2008 resulted in an additional 260,000
deaths from cancer alone between 2008 and 2010 (Maruthappu et al. 2016).
The evidence suggests, then, that we have moved into a new era in which,
unlike forms of white-collar crime studied by an earlier generation of scholars,
contemporary financial crime threatens the stability of entire economies and
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Robert Tillman
Financialization
Among the most important trends that have transformed the corporate land-
scape, and the financial services industry in particular, in recent years has been
financialization, which can be defined broadly as “a pattern of accumulation in
which profits accrue primarily through financial channels rather than
through trade and commodity production” (Krippner 2005: 178). The broad
scope of financialization is captured well in the following passage from jour-
nalist Rana Foroohar’s book Makers and Takers (2016: 6):
The financialization of America includes everything from the growth in size and
scope of finance and financial activity in our economy to the rise of debt-fueled
288
The Price Is Not Right
(1) the financial services industry has come to dominate the economy to an
unprecedented extent;
(2) many economies, both regional and national, have become increasingly
dependent on financial services, which can skew policies in favor of
those industries;
(3) firms within and outside the financial services industry have shifted
their focus from improving the quality of their products or services to
increasing the value of their stock; and
(4) levels of compensation in the financial services industry have dramat-
ically increased, creating opportunities for individuals to amass large
fortunes in relatively short periods of time (Tillman et al. forthcoming).
These trends have also altered the opportunity structures for white-collar
crime and in what follows each is discussed in more detail.
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Robert Tillman
wage data. During the 1950s wages paid to financial workers were, on average,
about the same as those paid to workers in other sectors. By 2007, employees
in the financial industries were receiving paychecks on average 181 percent
higher than workers in other industries. These workers were part of the
machinery controlled by “financial oligarchs” who, centered on Wall Street,
“truly believe that they control the levers that make the world go round”
(Johnson 2009: 50).
The dominance of the financial services sector is also reflected in the scope
of its activities and the number of people it affects. In 1970, an average of 12
million shares were traded daily on the New York Stock Exchange. By 2000, an
average of just over 1 billion shares were bought and sold every day. By the
end of the twentieth century it was no longer just the upper classes who
participated in the stock market. The proportion of Americans who owned
stock either directly or through mutual funds or pension plans increased from
10 percent in 1970 to 48 percent in 2000 (Phillips 2002: 140). The primary
beneficiaries of this growth were investment banks. Between 1999 and 2008,
JP Morgan saw its assets increase from USD 667 billion to USD 2.2 trillion. At
Goldman Sachs, assets grew from USD 250 billion in 1999 to USD 1.1 trillion
in 2007 (Financial Crisis Inquiry Commission 2011: 65). This growth created
so-called “too big to fail” institutions whose size made them essential to the
financial infrastructure and gave them a choke-hold on the economy.
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The Price Is Not Right
and opposing crackdowns on illegal practices. In 2009, when angry calls were
heard in Washington to reduce the bonuses of executives at the bailed-out
insurance giant AIG,2 then New York governor David Paterson defended the
company: “At the end of the day, when they shut those bonuses down, they
were shutting New York State down. That’s where we got our tax dollars”
(Blain 2009). Political leaders in England took similarly defensive postures in
2012 when state and federal authorities in the United States accused British
insurer Standard Chartered of violating American restrictions on doing busi-
ness in Iran. John Mann, a Labour MP, saw in the regulatory action “an
increasing anti-British bias by US regulators and politicians aimed at shifting
financial markets from London to New York” (Rushe and Treanor 2012). These
political responses to allegations of financial wrongdoing are examples of what
Clift and Woll have called “economic patriotism,” by which they mean: “eco-
nomic choices which seek to discriminate in favour of particular social groups,
firms or sectors understood by the decision-makers as insiders because of their
territorial status” (Clift and Woll 2011). The implicit argument made by the
apologists cited above is that the harms caused by financial malfeasance are
greatly outweighed by the economic benefits they bring to society, or at least to
the society in close geographical proximity to the misdeeds.
Financial Engineering
As financial firms have come to dominate many economies, many non-
financial firms have adopted their goals and methods, incorporating financial
engineering strategies into their core business models. Foroohar described this
trend concisely: “financial thinking has become so ingrained in American
businesses that even our biggest and brightest companies have started to act
like banks” (emphasis in original) (2016: 4). Indeed, a number of large non-
financial companies have begun providing many services that once were only
offered by retail banks, a trend that Olivier Godechot refers to as bankarization
(2015: 4). The retailing giant Wal-Mart, for example, now offers its customers a
full array of banking and money services, from check cashing to money
transfers.
In this newer model an emphasis on research, product development, and
increased efficiency is replaced with a predominant focus on maintaining the
firm’s stock price. To accomplish this goal, companies employ armies of
lawyers and accountants in an effort to reduce their tax exposure, to buy
2
President Obama blasted the company in public comments: “This is a corporation that finds
itself in financial distress due to recklessness and greed.” CNN, “Obama Tries to Stop AIG Bonuses:
‘How do they justify this outrage?’ ” March 16, 2009. <http://www.cnn.com/2009/POLITICS/03/
16/AIG.bonuses/>.
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Big Money
While most people have heard about the sky-high salaries paid to star traders
and executives on Wall Street many fewer probably read a Business Insider
magazine article that reported that in 2015 summer interns at investment
banks were earning the equivalent of USD 85,000 a year (Crowe 2015). By
itself this fact is not that important but it does reflect a significant shift in the
financial services industry. Working on Wall Street or being employed as a
trader in the Chicago Mercantile Exchange used to mean a steady, if not
grand, income and a reasonable retirement package. But in the 1970s that
began to change as remuneration in the financial sector began to skyrocket.
This increase becomes more apparent when salaries in that industry are com-
pared with those in another profession, engineering. Until the 1980s, highly
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Three Schemes
Manipulating Markets for Electrical Energy
In early 2001, the term “energy crisis” was given a new meaning when
California began experiencing shortages of electricity, leading to “rolling
blackouts”—planned reductions in the availability of energy utilities that
resulted in power outages in certain communities. President-elect George
W. Bush blamed the situation on environmental policies that restricted
energy supplies. But the public would soon learn otherwise. Investigations
in the aftermath of the crisis revealed how massive changes in the system of
electricity production and distribution from a highly regulated system to a
deregulated system in which electricity was bought and sold on electronic
auction platforms created numerous opportunities for fraud and market
manipulation. Traders at firms such as Enron were able to take advantage of
a number of loopholes in the system—a system that Enron had a hand in
creating—to make enormous profits at the expense of consumers.
By 2002, the electrical energy trading industry was declared all but dead by
the media, with the big players such as Enron and Dynegy departing the
market in disgrace. But, at the same time, new players were moving in; not
energy companies but investment banks. In 2002, Swiss bank UBS purchased
Enron’s trading unit and within a few years was followed into the market by
Wall Street powerhouses such as Bear Stearns, Goldman Sachs, Merrill Lynch,
and Deutsche Bank. With all that had been revealed about the failures of the
deregulated system one might think that policymakers would have plugged
up all its holes, and they did, in fact, make some significant changes. But many
opportunities for fraud remained.
The investment banks quickly began to apply the tactics of “arbitrage”—
playing one market against another—to electrical energy markets. In Califor-
nia that market comprised several separate but related markets: a “day-ahead”
market in which transactions involved “physical products” because they
required the actual delivery of electricity, and a “financial products” market,
in which transactions were, in essence, bets on the future direction of electri-
city prices (Federal Energy Regulatory Commission 2012a). Trades in this
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3
In its complaint against Barclay, FERC described the daily price index in the following way:
“One of the most commonly used indices and the relevant one for this case was the
Intercontinental Exchange (‘ICE’) daily index. During the relevant time, much of the electricity
trading in the western U.S. occurred on ICE . . . The ICE daily index was an index published by ICE
each trading day based on the VWAP of all day-ahead fixed-price physical electricity transactions at
a particular trading location . . . The ICE daily index was set by a methodology that calculates an
index price based on the VWAP of all contributing volumes and prices traded on ICE. The volumes
and prices that ICE used to calculate the daily index price were those trades that occurred in the
day-ahead fixed-price physical market, a market commonly referred to as the ‘cash’ or ‘dailies’
market. In the dailies market, traders bought and sold electricity for physical delivery the following
day at fixed prices (e.g., 25 MW/h of peak MIDC electricity for delivery the following day priced at
$50 per MW/h),” US Federal Energy Regulatory Commission v. Barclays Bank et al., 6.
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“I totally f**kked with the Palo mrkt today . . . Was fun. Need to do that more
often” (US Federal Energy Regulatory Commission v. Barclays Bank et al.: 39).
Investment bankers discovered other ways to game the electrical energy
markets. The system in place in California, and in other states, was designed
to increase competition and, at the same time, stabilize the market by means
of various mechanisms that were supposed to reduce volatility and risk to
market participants. One of these was what was known as “make-whole
payments.” How this mechanism operated was, like the larger market itself,
extremely complex but it boiled down to this. Electrical energy generators
could actually be paid for producing electrical power at a loss when their bid to
produce electricity was so low it did not cover the costs of actually producing
power. In California the formal mechanism through which this operated was
called Bid Cost Recovery or BCR payments.
One of the investment banks that was quick to see the potential of this
mechanism was JP Morgan, which in 2008 came into possession of two
money-losing power plants in southern California. The plants quickly became
profitable when JP Morgan, operating through a subsidiary, JP Morgan Ven-
tures Energy Corporation (JPMVEC), implemented a “make money by losing
money” strategy that relied on BCR payments. In 2013 FERC accused the firm
of gaming the system, claiming that in an eight-month period beginning in
August 2010, “JPMVEC collected market revenues of $21.9 million for these
two plants while spending $29.5 million on gas and operating costs, for a loss
at market rates of $7.6 million. But because of $34.6 million in BCR payments,
the units generated profits on a marginal cost basis of $27 million over those
months” (Federal Energy Regulatory Commission 2013).
JP Morgan eventually paid USD 410 million to settle the charges (Federal
Energy Regulatory Commission 2013a). FERC also leveled market manipula-
tion charges against several other investment banks involved in the electrical
energy business, including Barclays, which was ordered to pay USD 453
million in penalties, and Deutsche Bank, which paid USD 1.6 million for
illegal actions in California in 2010 (Federal Energy Regulatory Commission
2013b, 2013c).
The implications of investment banks being involved in the “real econ-
omy,” such as commodities markets, was summed up by consumer activist
Tyson Slocum as follows:
When Wall Street banks engage in electricity trading, they often aren’t interested
in building value, hiring workers and introducing innovations. Instead, they seek
to exploit or create loopholes to bend the market to their advantage. They’re not
interested in fair competition, but rather twisting the rules to maximize their
profits at the expense of honest Americans.
(Blair 2013)
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Libor
The same logic that led investment bankers to see the profits in rate rigging in
electrical energy markets also led them to understand the value of manipulat-
ing interest rates, as was revealed in the ongoing Libor scandal. Indeed, many
of the same investment banks were involved in both scandals. As in the
electricity price schemes, the Libor scandal involved large financial institu-
tions exploiting little-known technical mechanisms in the financial infra-
structure for enormous profits. As journalist Matt Taibbi (2013) put it:
The banks found a loophole, a basic flaw in the machine. Across the financial system,
there are places where prices or official indices are set based upon unverified data sent
in by private banks and financial companies. In other words, we gave the players with
incentives to game the system institutional roles in the economic infrastructure.
Here again we see how financial complexity creates the opportunity for cor-
ruption and collusion on a grand scale.
As part of the machinery of the global banking system, Libor is a crucial
baseline measure that affects nearly every aspect of the global financial sys-
tem, from complex financial derivatives through mortgage rates to interest on
student loans. Around USD 700 trillion in derivative contracts around the
world are based on Libor. Banks not only lend money but also borrow money
from each other and Libor is a measure of the average amount that banks have
to pay each other for loans for set periods of time—for example, three
months—for different currencies. Significantly, Libor is not based on actual
transactions between banks but on estimates of interest rates submitted by
major banks to the British Bankers Association in London every day. An
average is calculated and that rate is then used by financial institutions glo-
bally to set a baseline for interest rates on all kinds of financial instruments.
In theory, Libor is an objective measure of the costs of borrowing money. In
reality it is just another financial instrument that is vulnerable to manipula-
tion and distortion by small groups of individuals in key positions in the
economic infrastructure. This became apparent in June 2012 when the busi-
ness press reported that Barclays Bank had reached an agreement with author-
ities in the United States and the United Kingdom to pay USD 450 million in
fines and penalties to settle charges that it had manipulated Libor (Colchester
and Eaglesham 2012). The allegations claimed that Barclays had manipulated
the rate to achieve two purposes. One was to affect derivatives transactions in
which the bank was involved. The other was to lower the bank’s perceived
borrowing costs to give a misleading impression of its financial health.
In the first type of scheme, derivatives traders and persons responsible for
Libor submissions (submitters) were caught in email exchanges colluding to
fix the daily Libor rate, as in the following.
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Robert Tillman
Barclays’s three-month dollar Libor submission on March 13, 2006 was 4.90
percent, just as the trader had requested.
After the financial crisis began in 2008 banks were being scrutinized more
carefully by regulators for weaknesses. One sign of weakness was increased
borrowing costs, which would have indicated poor financial health which
could have resulted in lower share prices. Investigators discovered emails from
managers at Barclays stating that they were forced to submit low numbers to
Libor because all the other banks were doing it and they did not want to appear
to be paying higher rates than the others (US Department of Justice 2012).
Barclays was only the first large bank to become ensnared in the investiga-
tions of Libor cheating. By 2015, many of the world’s largest banks were
implicated in the schemes and punished with fines and penalties, including
UBS, Royal Bank of Scotland, JP Morgan, Citigroup, and Deutsche Bank.
A handful of traders have been prosecuted and convicted, but, as of this
writing, no high-level banking executives have been charged with crimes.
Because banking customers were not directly involved it is difficult to gauge
the costs of the Libor crimes. But it is important to recognize that many
individuals and communities are affected by Libor and even small movements
in the rate can have serious consequences. In the United States, cities, coun-
ties, and states invest in interest rate swaps based on Libor to help fund public
works projects. When the Libor rates were artificially suppressed, they were
forced to pay more for those projects. One of the cities in question, Philadel-
phia, filed a lawsuit in July 2013 against a number of large banks, asserting that
they had “artificially and collusively suppressed Libor, which had the effect of
secretly tilting the swaps in their favor, causing the banks to be substantially
‘in the money’ when they did not deserve to be, and effectively raising the
losses to the City of Philadelphia” (City of Philadelphia v. Bank of America 2013:
20). The result exacerbated a severe budget crisis for the city’s school district
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The Price Is Not Right
which was forced to lay off teachers and make cuts to music, language, after-
school, and gifted student programs (Ward 2012: 3).
The FX Fix
Revelations about the efforts by large international banks to manipulate Libor
led to concerns that other key benchmark rates might also be vulnerable to
deliberate rigging schemes. It did not take long for those fears to be realized. In
May 2015, four of the largest banks in the world—Citigroup, JP Morgan Chase,
Barclays, and Royal Bank of Scotland—agreed to plead guilty to US felony
charges for their activities in manipulating FX rates over a number of years.4
The FX rate-rigging schemes had much in common with the Libor manipula-
tion scandal. In both cases, key benchmarks were determined by individuals
who were also involved in transactions based on those benchmarks and had
clear incentives to move those benchmarks in one direction or another. As
with Libor, foreign exchange markets are huge, with USD 5.3 trillion changing
hands every day. Many of the same banks were implicated in both the FX and
the Libor scandals.
Foreign exchange rates move up and down throughout the day but, as with
other markets, traders and investors need a benchmark rate to set the stand-
ards against which transactions can be evaluated. At 4 p.m. London time every
weekday, the transactions for the most frequently traded currencies, including
the US dollar and the euro, are monitored for 60 seconds and a median
exchange rate is calculated or “fixed,” and that becomes known as the “fix-
rate.” There are a number of ways that banks can profit from rigging the fix-
rate. Banks buy and sell foreign currencies for clients and will often take a
“buy” order at the daily fix-rate. If banks can buy the currencies at rates below
the daily fix-rate then they stand to profit from the transaction. But this would
require them to know what the daily fix-rate is going to be. One way they can
do this is to collude with traders at other banks to submit buy and sell orders
in the 60-second “fix” period so that the rate is driven up. Often times,
this requires other traders to stand down, to not submit orders during the
fix period.
Evidence of this collusion was found in numerous email communications
between FX traders in which they openly discussed collaborative efforts to set
4
A fifth bank, UBS, was also accused of forex manipulation but was not charged with criminal
violations. However, it did agree to plead guilty to charges involving Libor manipulation. In her
press conference announcing the charges Assistant Attorney General Janet Caldwell specifically
cited the bank’s violation of its Libor-related deferred prosecution agreement, stating: “UBS has a
‘rap sheet’ that cannot be ignored. Within the past six years, the department has resolved criminal
investigations of UBS three times, resulting in non-prosecution or deferred prosecution
agreements . . . Enough is enough.” US Department of Justice 2015.
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Robert Tillman
the rate. For example, in the exchange below, a trader from JP Morgan Chase
(JPMC) is discussing with a trader at an undisclosed bank (Bank X) a plan to
manipulate the 4 p.m. “fix rate” just before the fix period.
As in the other case studies, while the collusive transactions were carried out
by lower-level traders, their actions were fully sanctioned and encouraged by
their superiors. At Barclays Bank, according to the New York State Department
of Financial Services: “the misconduct at the Bank was systemic and involved
various levels of employees . . . The culture within the Bank valued increased
profits with little regard to the integrity of the market” (2015).
Conclusion
This chapter began with an effort to view financial crimes in the context of the
broader economic trend of financialization. Building on previous research
I argued that financialization has had significant effects on the financial
services industry and on non-financial firms. These changes include: (i) the
increasing dominance of financial services in the economy; (ii) a growing
economic dependence on financial services; (iii) a shift in non-financial
firms to a focus on financial engineering and maintaining or increasing
stock prices; and (iv) a dramatic increase in compensation for workers in the
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financial services sector. These trends, I argued, have enhanced the crimino-
genic tendencies present in the financial services, as well as other industries.
Next I presented three case studies that illustrate the criminological conse-
quences of these larger economic shifts. The three case studies involve efforts
by financial industry insiders to profit by manipulating entire markets by
altering the infrastructure of those markets, tinkering with the mechanisms
by which prices and rates are set. The analysis of these forms of financial crime
has implications for both mainstream economic theories of markets and for
economic sociology, which I will only briefly mention here.
Contemporary economic theories of financial markets rest on the assump-
tion that these systems function efficiently because participants respond
rationally to “signals” being emitted by the market, signals that provide
information on which investment decisions can be made (Fama 1970).
These signals—which include things such as interest rates, foreign exchange
rates, and electrical energy prices—are assumed to have an objective quality,
which, like measures of rainfall or the movement of glaciers, are unaffected
by human behavior. The case studies presented in this chapter have shown
that many of these “signals” are in fact social constructs, the practical
accomplishments of individuals in specific social settings that are governed
by their own norms of behavior. As in the movie The Wizard of Oz, in which
the omnipotent Oz is revealed to be an old man behind a curtain pushing
buttons and pulling levers, the majestic view (often promoted by main-
stream economists) of financial markets as efficient perpetual motion
machines is belied by the reality that they consist of real human beings
making phone calls, sending emails, and texting one another, usually in
pursuit of legitimate ends. But this reality also creates innumerable oppor-
tunities for these finance workers, usually at the behest of their superiors, to
manipulate the marketplace.
This view of financial markets is consistent with the growing literature in
the sociology of financial markets (Knorr-Cetina and Preda 2005). From this
perspective, things like the daily price index for electricity, Libor rates, and
foreign exchange fix-rates can be understood as “market devices.” In Muniesa
et al.’s (2007) formulation, these are defined as “the material and discursive
assemblages that intervene in the construction of markets.” These devices can
include material objects such as cash registers and stock tickers, as well as
financial instruments such as derivatives, all of which serve to organize mar-
kets by providing the means of conceptualizing markets and creating stand-
ardized calculations (Preda 2006). Measures of market activities—prices,
ratings, indices—could be included in this conceptual framework. Fligstein
and Roehrkasse recently suggested that the literature on “market devices,”
while important for economic sociology, has tended to see their constructive
aspect, to assume that “they are relatively immune to manipulation and
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abuse.” They argue that we should “expand analysis of market devices—to ask
how their complexity gives market actors the ability to be fair or fraudulent”
(Fligstein and Roehrkasse 2016). This chapter, hopefully, represents a very
small step in this direction.
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